It seems that “everything’s up to date in Kansas City”*—and the rest of Kansas for that matter—when it comes to the tax treatment of SaaS, or software as a service. On Monday, in an opinion letter issued by the Office of Policy and Research, the Department of Revenue determined that charges for a “hosted software product” are not subject to sales tax. Citing to its previously-issued guidance on the taxation of computer charges and internet sales, and on the heels of a related opinion issued by the Department last summer on the taxation of remote access to online games and virtual goods, it may now be safe to say that the Department has gone about as far as it will go. That is, the state’s guidance on the issue is clear and definitive: Access to software or applications, etc., by itself, is not a taxable service per the Department. By contrast, remote access plus downloading, leasing or owning that software or applications is subject to sales tax.
Download and You’ve Gone Too Far!
In the Opinion, the Department considered whether a service charge billed for access to a “hosted software product” was subject to sales tax. In this case, the software at issue was a web-based teaching series of the type that has become increasingly popular for doctors and dentists who practice in states where continuing education is mandatory for licensing purposes or who wish to reduce their time away from their practices by traveling to medical seminars. The programs generally work whereby the doctor, using her own Internet capable device, accesses a company’s website and, through that website, watches an instructional video or reads a journal that is “hosted” (read: the file containing the data is physically located on) a server located outside of Kansas.
Notably, the Opinion makes clear that if the doctor does more than simply access and views the media (read: downloads the file), and is charged for the same, sales tax will apply. Citing to K.S.A. 79-3603, the Department provides that if the doctor is charged only for the accessing to a file that is entirely “installed, hosted and accessed from a remote server or location” then no tax will apply as there would be no delivery or installation and therefore, no title or possession of computer software whereby that software—defined under the statute as tangible personal property—would be taxable.
As explained in the taxpayer’s request for opinion, the service at issue in the Opinion is described as nothing more than access to a web-based learning system (read: streaming video), whose file is physically located on an out-of-state server. But, what if the doctor wanted to buy access to the video so that he could then watch it during an upcoming flight from Boston to London (where his Internet access would be limited, if not costly and/or non-existent)? The sale of a download of the seminar would presumably be taxable as the sale of prewritten software in Kansas. What if the company providing the seminar was sensitive to the doctor’s schedule but nonetheless reluctant to change its business model/offerings? Moreover, what if—irrespective of how the company sold or limited access to the video—there was an app for video like Instapaper (Keepvid.com? Maybe the Boxee app?) that would allow the Doctor to save streaming video to his iPad for offline viewing? If the doctor is able to save streaming files in a manner that allows for offline retrieval (Would the company be required to prevent this? Can it?), then what? Is this just a matter of the state catching up to the tech? Is the eventual taxation of access—SaaS—inevitable? Perhaps, then, they’ve not gone as far as they can go…
*Given the sparse, albeit growing, list of states that have weighed in on cloud taxation, maybe Rogers and Hammerstein were really onto something when they penned the song “Kansas City”–an ode to K.C.’s ability to beat the sleepy farm towns of Okie with the latest and greatest–for their musical “Oklahoma!” (“Everything’s up to date in Kansas City; They gone about as far as they can go…”)