State & Local Tax Alert

Transcription

1 State & Local Tax Alert Breaking state and local tax developments from Grant Thornton LLP Pennsylvania Letter Ruling Declares Information Retrieval Subject to Sales Tax Recently, the Pennsylvania Department of Revenue issued Letter Ruling SUT , concluding that sales of information retrieval products accessed electronically are subject to Pennsylvania sales and use tax as sales of tangible personal property. 1 This ruling marks the second Department-issued guidance this year involving its interpretation of the expanded tangible personal property definition under Act 84 of 2016, which now includes canned computer software and other digital products. 2 In the letter ruling, the Department determined that a vendor s sales of subscription-based online research services are taxable because the vendor s subscribers exercise a license to access canned software, and because the content itself constitutes tangible personal property under Pennsylvania law. Background Numerous computer services were subject to sales and use tax in Pennsylvania from October 1, 1991 until July 1, 1997, when legislation repealed the taxation of computer programming, computer integrated systems design, computer processing, data processing, information retrieval, computer facilities management and other computer-related services. 3 Since the repeal 20 years ago, Pennsylvania sales or use tax did not apply to information retrieval services. The Pennsylvania regulation on computer services, rescinded effective February 23, 2008, defined information retrieval as providing data through a computer to either an on-line or remote computer or peripheral equipment upon request. 4 Data was defined as facts, figures and information. 5 The regulation included examples of what was, or was not, an information retrieval service. An example of an information retrieval service was providing information through a computer upon the computer-aided request of the purchaser. The purchaser performs various searches to obtain the necessary information. 6 By contrast, examples of services that were not information retrieval were stock quotation services or news reporting services unless the information is provided as the result of a direct inquiry. 7 Release date October 25, 2017 States Pennsylvania Issue/Topic Sales and Use Tax Contact details Jerry Glynn T E jerry.glynn@us.gt.com Matthew Melinson T E matthew.melinson@us.gt.com Patrick Skeehan T E patrick.skeehan@us.gt.com Josh Corbran Pittsburgh T E josh.corbran@us.gt.com Jamie C. Yesnowitz Washington, DC T E jamie.yesnowitz@us.gt.com Chuck Jones Chicago T E chuck.jones@us.gt.com Lori Stolly Cincinnati T E lori.stolly@us.gt.com Priya D. Nair Washington, DC T E priya.nair@us.gt.com 1 Pennsylvania Department of Revenue, May 17, 2017 (released Aug. 2, 2017). 2 Act 84 (H.B. 1198), Laws 2016, amending 72 PA. STAT. 7201(m). 3 Former 72 PA. STAT. 7201(dd)-(ii); former 61 PA. CODE Former 61 PA. CODE 60.13(a). 5 Id. 6 Former 61 PA. CODE 60.13(f)(1)(ii). 7 Former 61 PA. CODE 60.13(f)(2)(iii)..

2 Grant Thornton LLP - 2 In July 2016, the Pennsylvania General Assembly enacted Act 84, which, effective August 1, 2016, amended the definition of tangible personal property to include various digital products, including videos, books, any otherwise taxable printed matter, applications, games, music, audio and any other otherwise taxable tangible personal property electronically or digitally delivered, streamed or accessed. 8 The statute expressly includes canned software within the definition of tangible personal property. 9 Such digital goods and canned software are subject to tax, whether electronically or digitally delivered, streamed or accessed and whether purchased singly, by subscription or in any other matter. 10 The statute does not explicitly include information retrieval products within the definition of tangible personal property. Letter Ruling SUT In light of the broadened definition of tangible personal property under Act 84, a taxpayer sought guidance from the Department as to the specific sales and use tax treatment of its information retrieval product. The vendor at issue sells subscription-based online research services used by professionals in various industries, including accounting, tax, finance and law. Subscription to the product allows users to access primary sources including statutes, regulations and court opinions, in addition to various secondary sources. The information retrieval products are maintained on servers located outside Pennsylvania and accessed by third-party Web browsers running on subscribers computers or other devices. Subscribers can retrieve the information via an advanced search function whereby they input key-word search terms, which are then transmitted to the host servers and the search results are returned to the subscribers and presented according to their preference (e.g., in a chart or listing). The Department ruled that the taxpayer s information retrieval products constitute tangible property under Pennsylvania law. Interpreting the statutory and regulatory provisions as applied to the taxpayer, the Department analyzed both the functionality and resource content of the information retrieval services. Looking first to the functionality of the product, the Department noted that subscribers use the search functions by entering commands transmitted by a Web browser to the taxpayer s servers, which process the queries and return the results to the subscriber. By utilizing the search functions, the Department reasoned, the subscriber exercises a license to use canned computer software, and exercises power and control over the software. 11 The Department separately considered the resource content of the information retrieval products, finding that such content constituted electronic access to tangible personal property. Relying primarily on the catchall provisions of the expanded tangible personal property definition, the Department found the sale of the subject information retrieval 8 72 PA. STAT. 7201(m)(2). For a discussion of this legislation, see GT SALT Alert: Pennsylvania Enacts Budget Legislation Expanding Sales Tax Base, Establishing Tax Amnesty Program PA. STAT. 7201(m)(2)(ix). Previously, canned software was considered to constitute tangible personal property as established through case law and Department regulations. See Dechert LLP v. Commonwealth, 998 A.2d 575 (Pa. 2010); Graham Packaging Co. v. Commonwealth, 882 A.2d 2076 (Pa. Commw. Ct. 2005); 61 PA. CODE 60.19(c)(2)(i) PA. STAT. 7201(m)(2). 11 See 72 PA. STAT. 7201(m)(2)(ix); Graham Packaging Co., 882 A.2d 1076 (Pa. Commw. Ct. 2005).

3 Grant Thornton LLP - 3 products to constitute electronically or digitally delivered books, other otherwise taxable printed matter, and other otherwise taxable tangible personal property. 12 In conclusion, the Department determined that the information retrieval products constitute taxable tangible personal property because the transactions are comprised of both (i) a license to electronically access and use canned computer software and (ii) the right to electronically access tangible personal property. This position signifies a clear departure from the Department s non-taxable position on information retrieval services held for 20 years. Commentary Letter Ruling SUT is another example of the expansive, and arguably overreaching, application of tangible personal property as defined under Act 84 and as interpreted by the Department. 13 Applying the provisions of Pennsylvania law, the Department has taken the position that electronic information retrieval (whether referred to as a product or a service ), whereby subscribers use Internet-based research services to access statutes, cases, regulations and other secondary sources, constitutes tangible personal property. In past years, the Pennsylvania legislature specifically defined information retrieval as a taxable computer service. In a time when research products or services were available in both electronic and paper versions, the same as they are today, it is unclear why the legislature determined it was necessary to specifically define electronic information retrieval services apart from tangible personal property. Arguably, the distinction was because information services are actually a (computer) service, which, since the repeal of the tax on computer services, is not one of the specifically enumerated taxable services in Pennsylvania today. Of the half-dozen or so states that specifically tax information services, such as New Jersey and New York, they have statutorily identified it as a taxable service, thereby eliminating any need to administratively recast it as a form of taxable tangible personal property. 14 It is worth noting that Act 84 was hastily enacted into law in July 2016, which could help explain why there are no definitions or examples of the types of digitally delivered tangible personal property that the legislature intended to tax, or exempt from tax. The background surrounding the passage of Act 84 is instructive in reflecting why the bill was passed so quickly. Pennsylvania has a constitutional balanced budget requirement which must be met by June 30, the end of its fiscal year. In an effort to timely meet its balanced budget responsibilities, the Pennsylvania House and Senate approved the spending side of the fiscal budget and sent this legislation to Governor Tom Wolf on July 1, See 72 PA. STAT. 7201(m)(2)(iv), (x). 13 In February 2017, the Department issued Letter Ruling SUT , its first letter ruling involving the expanded definition of tangible personal property, specifically software support services. It should be noted the statutory definition includes maintenance, updates and support, but it does not specifically define these terms. The Department s ruling took many by surprise in concluding that the term support comprised a wide range of support services, including software consulting and training services. After considering responses from taxpayers and practitioners questioning the scope of its authority, the Department removed the ruling from its Web site and reissued the ruling on April 4, The revised ruling concluded that help desk, call center and technical support services to canned software constitute taxable services, but not consulting or training services. 14 See N.J. REV. STAT. 54:32B-3(b)(12); 54:32B-2(yy); N.Y. TAX LAW 1105(c)(1).

4 Grant Thornton LLP - 4 Rather than immediately signing the legislation approving the state spending measure, the governor took no action, so that after a 10-day delay, the legislation automatically became law on July 12, Despite the passage of the spending bill, the legislature was under pressure to immediately pass a revenue bill to complement the spending bill and ensure a balanced budget. Act 84, the revenue raising element of Pennsylvania s budget, was signed into law the next day, on July 13, The Department s position on information retrieval may concern taxpayers for a number of reasons. It is possible that the Department may expand the reach of this ruling or its interpretation of tangible personal property to include similar types of services, including other computer-generated information services, the digitally delivered output of data processing services, or Web design services. Given the expanded scope of taxable products and services under Act 84, the Department appears to be moving in a direction where it believes it has the authority to tax computer services by looking to the underlying content that is the object of the service provided, as opposed to looking at the item for what it is a service. It is uncertain whether the letter ruling may apply retroactively to sales of information retrieval services dating back to August 1, 2016, the effective date of Act 84. Moreover, the Department has not indicated whether it would assert that electronic access to information services dating to 2012 is subject to tax under the reasoning of Letter Ruling SUT This ruling subjected cloud computing services to tax where customers located in Pennsylvania exercise a license to access canned computer software. On the other hand, taxpayers are still entitled to source a portion of the transaction outside Pennsylvania based on the number of customers located outside the state. It is likely that the Department s position on information retrieval products will be challenged by taxpayers. Until more clarity in this area is provided, taxpayers should analyze the potential exposure resulting from sales of information retrieval products made during periods open under the statute of limitations, and consider the financial accounting requirements and/or available avenues to remediate the liability. The information contained herein is general in nature and based on authorities that are subject to change. It is not intended and should not be construed as legal, accounting or tax advice or opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to or suitable for specific circumstances or needs and may require consideration of nontax and other tax factors. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Grant Thornton LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, 15 Act 16A (S.B. 1073), Laws It should also be noted that the Democratic National Convention was held in in late July 2016, likely providing further motivation to enact the fiscal budget before the convention began. In addition, as of this writing, the budget for fiscal year , which began July 1, 2017, has still not been enacted. 17 Pennsylvania Department of Revenue, May 31, 2012.

5 Grant Thornton LLP - 5 facsimile transmission, recording, re-keying or using any information storage and retrieval system without written permission from Grant Thornton LLP. This document supports the marketing of professional services by Grant Thornton LLP. It is not written tax advice directed at the particular facts and circumstances of any person. Persons interested in the subject of this document should contact Grant Thornton or their tax advisor to discuss the potential application of this subject matter to their particular facts and circumstances. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed.