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States Continue to Tax Digital Goods


As cloud computing and digital goods continue to evolve, states continue to make up the rules as they go.  For even the seasoned sales tax attorney or other sales tax professional, the laws can be very different in each state.  However, in states that tax cloud computing, states will take the position that the software provided is taxable.  In a recent letter ruling, Texas took the position on several different software type products that are subject to sales tax.

What is Cloud Computing

Generically, cloud computing is a software delivery system in which customers access the software remotely by using a third-party provider.  For business, it allows many users to access software without dealing with the associated IT headaches that can bog down a company.  Even the most traditional and outdated businesses, like sales tax lawyers’ offices, use cloud computing and many organizations use them in multiple states.

The primary issue from a sales tax perspective is identifying what is being purchased by the customer.  Are they using the software?  If so, should traditional software rule apply? Is the SaaS purchased by the consumer a service?  Is that service taxable? There tend to be no clear-cut boundaries to distinguish traditional software, SaaS, and other similar digital products.

Texas PLR 202003012L

Like many states, Texas has a generic law that taxes information services and data processing services.  Data processing service is defined in Texas as data entry, retrieval, search, and other computerized data and information storage or manipulation.  Further, the service is subject to sales tax if SaaS, which is the remote of access of software provided by another, is subject to Texas sales tax.

In the letter ruling, the taxpayer asked the agency whether four different software products were subject to Texas sales tax.  The first product involved patient relationship management software, which allowed the customer to automatically schedule appointments, automatic recalls for patients, and prescription confirmation notices.

Product 2 was simply a cloud-based commerce solution that allows patients to order lenses from their computer, phone, or tablet.

Product 3 was a digital marketing solution.  The software drives online visibility by integrating the customer’s website with search engines and local service sites.

The final product provided a solution to maintain relationships with prior and current patients.

As most states tend to do, Texas reviewed the products and promptly determined that all of the services fit their broadly defined service laws.  If it sounds like software, the state revenue agency will just assume it is taxable and it is on the business to prove otherwise.

The SaaS problem in the sales tax world can be a problem beyond those who provide SaaS or computer programs.  Those that purchase SaaS or anything that resembles SaaS can be on the hook for large use tax liabilities if tax is not paid.  It is critical if you are selling or buying SaaS that you hire a sales tax lawyer or other professions to help you navigate these murky waters.

At Sales Tax Helper we help those in need of sales tax auditsprotests, and administrative litigation. More importantly, we provide services equivalent to tax attorneys at the price of a sales tax consultant. Simply put, this is what we do, and we will work hard to reach a reasonable resolution for your business’s sales tax liabilities. We welcome the opportunity to handle your sales tax issues and be part of your team!