Recently Missouri Department of Revenue amended their sales tax regulations on taxation of software. Specifically, 12 CSR 10-109.050 was amended to clarify the taxation of canned (pre-written) software, customized software, software as a service, and software licenses.
In general, the new regulations do not break new ground when defining what is canned software or customized software. The new regulations provide that canned software that is delivered in a tangible medium is subject to sales tax. However, if the canned software is downloaded via online, the canned software is not taxable. The new regulations do not tax customized software.
The regulations do break new ground for Missouri by addressing software as a service is not taxable. The new regulations describe cloud computing without mentioning it by name. Missouri refers to cloud computing as software as a service, 12 CSR 10-109.050 (2)(C). The definition includes the typical attributes of what cloud computing, however the Missouri legislature carved out a piece of cloud computing that is taxable. Cloud computing services are taxable if the user/purchaser has the right to use specifically identified TPP. For example, in many cloud-computing environments, a business wants to use dedicated servers to provide efficient use of resources. However, in Missouri a business will not enjoy the tax-exempt status that other states provide.
The final part of the amendment addresses the taxation of software licenses. In general, software licenses are taxed if they are a part of the original sale agreement. However, if licenses are purchased at a subsequent time or via a third party, they are not taxable.
This new legislation may shift how enterprises conduct business by providing tax-planning opportunities. For example, a company needing a significant number of licenses can either purchase from a third party or purchase them outside of the original software agreement. Another example, a company may choose to obtain all their software by internet delivery. In addition, this legislation will leave Missouri businesses at a competitive disadvantage when competing for businesses that require specifically dedicated resources for their needs.