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.
Other recent “Cloud, Software & Digital Tax” posts by Carolynn Iafrate Kranz:
- SaaS Characterized as Taxable Telecommunications Service
- Pennsylvania Tax on Software Support Services: Ruling Re-issued
- Illinois Finally Rules on SaaS
- Tennessee’s Situsing of Accessed Software Runs Afoul
- Chicago Taxes the Cloud