One of my clients recently asked about a medical reference database that it offers to subscribers in Arizona. The client’s online research tool provides its subscribers with access to a database of information about medical procedures and related services. The question was whether Arizona transaction privilege tax (sales tax) or use tax applies to the revenue received from these subscriptions.
In researching the question, I found an October 2015 review of an administrative law judge’s decision. The review summary (Case # 201400197-S) was issued by the Director of the Arizona Department of Revenue (Department) and directly addressed the taxability of subscription revenue derived from online databases. While these reviews don’t have the force or effect of law, they are heavily relied upon within the Department to decide matters of taxability.
The taxpayer addressed in the review offers subscribers access to its research library to browse information and run searches for a fee (paid subscription). The taxpayer had argued that it does not sell tangible personal property (TPP) through this portal and subscribers do not have exclusive use and/or control of the online database. The taxpayer claimed that it simply provides its subscribers with access to the online portal so they can complete research and analysis on various topics. Further, the subscribers are not permitted to store any of the research contained on the site on their personal computers.
The Department audited the taxpayer and determined that its subscription revenue was subject to tax as a personal property rental. The Director affirmed this determination, finding that the database is actually a lease of software that qualifies as TPP and that the users have exclusive control and use of the software because the taxpayer does not assist its subscribers at the time the use of the software occurs. In essence, the Director found that the activity was a taxable use of software for consideration.
In the review, the Director cited a recent decision by the Colorado Court of Appeals (Ball Aerospace & Technologies Corp. v. City of Boulder), which found in a similar circumstance that subscribers purchase a right to access the database (software) and that such access is subject to tax.
On its face, the taxpayer’s offering appears to be a service, and since services are generally exempt from tax in Arizona, one would surmise that this offering would be exempt from tax as well. The Director’s review, however, found otherwise. Even though the website is presumably housed outside of the state, and even though the offering is not tangible in nature, the Director determined this seemingly exempt offering to be taxable.
This ruling could be either upheld or overturned should the taxpayer appeal it to Arizona’s State Board of Tax Appeals or pursue an action in the state’s Tax Court. The Director’s position may well be challenged at some point down the road.
Other recent “Medical Industry Tax” posts by James R. Dumler:
- Sales & Use Tax Refund Opportunities: Durable Medical Equipment
- Medical Equipment Tax Change Opens Door: CA Regulation 1591
- Taxability of Medical Database Subscriptions in Arizona
- Medical Industry Tax Updates: Sales & Use Tax Updates #3
- Leases of Mobile Medical Imaging Equipment - May Provide Tax Refund Options