Recently, the Idaho legislatures convened for a draft rule meeting to discuss the recently enacted HB598 (“Rule 027”). The goal of the meeting was to provide guidance and interpretation to assist taxpayers in complying with Rule 027. The end result will be a published administrative bulletin.

The legislatures discussed the sales tax policy and applied it to Rule 027. Fundamentally, tangible personal property (TPP) is subject to sales tax and services are not taxable. TPP includes pre-written software that is delivered in a tangible form. Pre-written software that is electronically delivered or accessed remotely is not taxable. However, entertainment software products are taxable regardless of the delivery method. In general, services are not taxable. But, if a service is delivered tangibly, it may be taxable. For example, a diagnostic service delivered on a cd maybe taxable. Not discussed, however, were several areas of taxability. These include tangible software product key, permanently loaded software with minimal function without access to provider’s services, and fee to view an entertainment product.

During the draft rule meeting, the legislatures displayed inconsistent application of the tax policy. Moreover, Idaho legislatures have difficulty reconciling that a service can be delivered via cloud or cd. In general, Idaho’s tax policy is to exclude services from sales tax.  However, the legislatures defined services by the method of delivery, not the content. For example, software that resides on a cloud is not taxable if downloaded via the internet. But, the same software content that resides on a disc/cd is taxable. In contrast, the legislatures are consistent when applying the tax policy to entertainment products. Entertainment products are taxable based on their content; not on the method of delivery (cd or internet).