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Arizona: Access to Digital Data is Lease of Tangible Personal Property

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In a decision that defies reason, an Arizona Administrative Law Judge ("ALJ") recently ruled that income from providing customers access to a research and data content was income from the lease of tangible personal property.  The Taxpayer is an information technology (“IT”) and research firm that produces and offers a variety of internally produced proprietary IT research and data compilation content.

The Taxpayer argued that it is a service provider, does not lease any tangible personal property, and that its services do not fall within the scope of the Arizona transaction privilege tax classification.  The Department argued that the Taxpayer is engaged in the business of  leasing, through subscriptions,  its research and data content.  The Department argued that the definition of “tangible personal property” under Ariz. Rev. Stat. § 42-5001(16) includes the taxpayer’s research and data content whether the content is printed out, viewed or delivered electronically.   Ariz. Rev. Stat. § 42-5001(16) defines “tangible personal property” as “personal property which may be seen, weighed, measured, felt or touched or is in any other manner perceptible to the senses.”

Agreeing with the Department, the ALJ noted that the taxpayer’s “business activities consist of the availability and provision of access to and use of [Taxpayer’s ] IT research and data content for a contracted length of time for a specific fee. “  Therefore, “such activity is the leasing of [Taxpayer’s]  tangible personal property for a consideration which is a taxable activity.”  Although the ALJ does not outright adopt the Department’s position that data or information which is viewed or delivered electronically constitutes “tangible personal property,” the ALJ’s decision necessitates such a conclusion.

The ALJ’s overly broad interpretation of the term “tangible personal property” could have far-reaching effects.  The ALJ’s decision is an open invitation for the Department to start taxing a whole host of other services without Legislative and statutory support.  Could credit reporting services, web page design services, and title search services be deemed tangible personal property?   This decision has created tax uncertainty, where none had previously existed, and that is never a good thing.

Your thoughts? Please feel free to submit your questions or comments below.


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.

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