Recently the Pennsylvania Department of Revenue (DOR) published written guidance on the taxability of services related to software and digital goods.
The new guidance follows recent DOR audit assessments and policies applied against both vendors and purchasers of these services, and addresses the department’s position on applying sales and use tax to the purchase of software licenses and consulting services utilized for purposes like the implementation, modification, configuration and support of taxable software and digital goods, as well as additional applications like website development, informational retrieval services and data sales.
Through the guidance, the DOR interprets the current statutory definitions of purchase price and the altering/repair of tangible personal property to apply to services that are performed in conjunction with the purchase of canned software, as well as those that may be performed separate from the sales of such technology. The interpretation discusses an analysis of whether the services are akin to the alteration, repair and maintenance of canned software based on past precedent and current statutory definition that the definition of tangible personal property includes canned software.
History
The taxability of computer services has changed throughout the years. Services were first defined as taxable in 1991 until repeal of that legislation in 1997 resulted in an exemption. In January 2000, the DOR issued Regulation Section 60.19 stating that if these computer services were separately identified from the sales and installation charges of canned software, they were to remain exempt from tax. In 2016, the legislature enacted Act 84, which expanded the definition of tangible personal property to include software regardless of method of delivery. Other than stating that separately invoiced helpdesk or call center support is not included in the definition of tangible personal property, Act 84 did not add computer services to the list of taxable services, therefore the criteria for taxability established in Regulation Section 60.19 remain valid regulations to determine the taxability of computer services.
Current Guidance
Per the recent guidance, the following computer services are considered taxable when performed in conjunction with the sale of, or performed to, canned software: configuration, modification, consulting to assist with identifying the software users needs, enhancement, modification, installation and project management. Additionally, information retrieval services, data sales, training and support services may be taxable depending on the nature of the services.
While the DOR guidance does provide statutory and case law authority in its analysis, it’s important to note that the guidance itself was not issued as a bulletin, notice or regulation and therefore does not set any legal precedent on its own. Additionally, while the DOR has stated it will treat this guidance as a clarification of past and existing law, it is inconsistent with both Regulation Section 60.19 and past audit assessments where these services were not assessed.
Our Thoughts On
Purchasers of computer services should be aware that the DOR’s assessments with respect to these services have been upheld at the administrative appeal levels and a number of these assessments are pending resolution at Pennsylvania Commonwealth Court. Before paying state sales and use tax, companies should analyze their taxability pursuant to the historic taxability framework and this recent guidance. In the meantime, our State and Local Tax team is poised to assist you with this analysis.
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