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Remotely Accessed Software Tax Exemption: Idaho’s Unique Spin

author photo of Carolynn Iafrate Kranz

On April 3, 2013, HB 243 was enacted in Idaho which exempts “application software accessed over the internet or through wireless media”, hereinafter referred to as remote access software. Prior to this time, the Idaho State Tax Commission took a policy position that “Application Service Provider” (“ASP”) and “Software as a Service” (“SaaS”) transactions were subject to sales and use tax as the sale of prewritten computer software, which was expressly included in the state’s definition of tangible personal property. On its face, one would think that the passage of the bill would provide clarification to an otherwise cloudy area of the law. However, the exemption for remote access software is showered with confusion by the language of its two limiting provisions.

An overriding issue surrounding the exemption is determining whether Idaho has the statutory authority to tax remotely access software, such that there is a need for the legislature to enact an exemption. Prior to the passage of HB 243, Idaho took the position that ASP and SaaS were taxable as the sale of prewritten computer software, which was and continues to be expressly included in Idaho’s definition of tangible personal property. Yet, the customer of ASP and SaaS offerings does not obtain possession or custody of prewritten computer software, nor do they maintain control over it.

HB 243 creates a carve-out from the definition of prewritten computer software for remotely accessed software, yet also creates two limitations to the carve-out. Because the State Tax Commission’s authority to tax remotely accessed software is questionable, the state’s position to continue to tax any remotely accessed software falling within these limitations continues to be ripe for challenge for the aforementioned reasons.

While the state’s authority to tax remotely accessed software falling within these limitations is questionable and worthy of discussion, the language contained in these limitations is also troubling. The two limitations to the carve-out, and their confusing approach, are discussed below.

Exception 1: HB 243 DOES NOT exempt remotely accessed software if the primary purpose of such computer software is for entertainment use.

“Entertainment use” is a term lacking any definition and one which the state will undoubtedly interpret broadly. Similarly, even the Commission’s Draft 1 Rule lacks any effort to define the phrase. The lack of any definition leaves taxpayers, particularly sellers, in a very difficult position – worried about audit risk and the risk of under-collecting sales tax as well as the risk that they over-collect on items they believe to have an entertainment use but which are later determined to have no such purpose.

Exception 2: HB 243 DOES NOT exempt remotely accessed software if the vendor of that computer software offers for sale, in a storage media or by an electronic download, to the user’s computer or server, and either directly or through wholesale or retail channels, that same computer software or comparable computer software that performs the same functions.

Similar to the concern above, the legislation lacks of any definition of the “same computer software” or “comparable computer software that performs the same functions.” This failure will inevitably create compliance problems as vendors and purchasers evaluate how much of a difference in functionality must exist before remotely accessed software fits within the carve-out.

Treating certain remotely accessed software as exempt only because the vendor does not offer a similar product on tangible or downloaded format while another vendor’s service offerings are taxable because they do offer software on a disk raises an Equal Protection concern and provides a poor policy basis for distinguishing between a taxable and exempt offering. We hope other states do not follow this approach.

Carolynn is the founder and Managing Member of Industry Sales Tax Solutions, LLC (“ISTS”), which offers a subscription database containing the sales and use taxability of software related transactions, digital content and cloud services; she is also the Managing Member of Kranz & Associates, PLLC, a boutique law firm specializing in state and local tax consulting. See Carolynn's AUTHOR page in order to send a message and/or consultation request.

Other recent “Cloud, Software & Digital Tax” posts by Carolynn Iafrate Kranz:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.

Comments

3 Responses to Remotely Accessed Software Tax Exemption: Idaho’s Unique Spin

  • Posted by Bob on June 26, 2013 6:11am:

    Carolyn,
    I have worked for 2 large software providers during the past 8 years and worked closely with multi-state taxability of their many offerings. To my knowledge, ASP & SAAS is not solely confined to the sale of software. Software providers will often BUNDLE such software with other services & if any of those other bundled components are taxable, the entire charge is taxable rendering the software location arguments moot.
    I also understand that software providers in offering ASP & SAAS, may identify the software charge as a "license fee" based upon x number of authorized users. Again, taxability of software licenses is far more liberal regardless of the physical location of the software.
    In still other instances, a "hosting fee" is charged in lieu of an outright charge for the software. And most if not all states have addressed taxability of this "service" charge regardless of where the software is physically cited.
    There is no question that states "muddy the waters" when they attempt to carve out portions of an otherwise not taxable good/service. And sadly, this is not confined to software/technology. Indeed, I believe that this "carving" exists to varying extents in virtually ALL industries.
    You have accurately pointed out the complexities that ID has created by their exceptions. It is these exceptions that complicate compliance for taxpayers. And I strongly suggest that the states come to grips & address these complexities.
    IMHO states should cease & desist from attempting to "play games" with their own sales tax schemes. If a state wants to tax an item/service, then tax it its entirety, otherwise LEAVE IT ALONE & wreak your damage elsewhere!
    Taxpayers & end-users may not appreciate the taxability of an item/or service, however, they WILL appreciate the simplicity of a state's sales tax scheme if it is free of the exceptions as you have noted in your excellent blog.

  • Posted by Nathan on June 20, 2013 2:12am:

    It looks like Vermont is using "carve our language" similar to Idaho now that Vermont's moratorium on prewritten software accessed remotely is expiring at the end of this month. Their newly issued fact sheet states "If the vendor has made the same or similar product available on a disk or for download, it remains software subject to sales tax if offered for remote access with essentially the same functionality."

    • Posted by Author photo of Carolynn Iafrate KranzCarolynn Iafrate Kranz on June 21, 2013 12:35am:

      Great point on Vermont - thank you for bringing this up. The position of the Vermont Department of Taxes is that SaaS is taxable as the sale/purchase of prewritten computer software. This had been Idaho's position prior to its recent legislation. Idaho may now have the added position of arguing that the legislature's express language that the carve outs are not exempt essentially gives them LEGISLATIVE authority to tax them. Vermont does not have this same position. Vermont's position to tax SaaS is a policy position adopted by the Department of Taxes - they are essentially applying a true object to test to determine whether a SaaS model is taxable as software, or exempt as a service (similar to other states, such as New York Michigan, Utah, etc.). Vermont's fact sheet is essentially spelling out how they will make this determination. The moratorium adopted by the Vermont legislature never went as far as Idaho's legislation (defining SaaS, creating carve outs, etc.), so Vermont likely does not have the same legislative argument that Idaho has (or one that is not as strong as Idaho's) - thus making it more ripe for challenge.

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