By Jason Skrinak, CPA, SALT practice leader, tax service group, RKL LLP

It has been well documented that the United States has transformed from a manufacturing economy to a service economy. Adding to that disruptive change has been the way technology has altered how we receive services. Pennsylvania, like most states, requires time to catch up to trends in the economy, and the taxation of computer software and services is no different.

Pennsylvania treats “canned,” software as taxable tangible personal property, regardless of the method of accessing it. Last year Pennsylvania updated the definition of tangible personal property to include digital downloads by the passage of Act 84 of 2016. The updated language basically says digital downloads are deemed to be tangible personal property subject to Pennsylvania sales and use tax. So downloading and streaming movies, books, and music through providers such as Netflix, Amazon, Hulu, or Sirius Satellite Radio are now taxable transactions. When you take a step back, you’ll see Pennsylvania is basically establishing a similar tax treatment, regardless of whether content is obtained at a brick-and-mortar outlet or an online retailer. Either method of purchasing “canned” computer software is taxable.

The treatment of digital downloads made sense to most state and local tax practitioners, but a smaller change in the statute went largely unnoticed until a recent Pennsylvania Private Letter Ruling (Sales and Use Tax Ruling No. SUT-17-001, originally issued Feb. 9, 2017). The provision that is most concerning is that tangible personal property included maintenance, updates, and support to canned software. The understanding that canned software is expressly considered tangible personal property also leads that maintenance and updates to tangible personal property is taxable, similar to other maintenance and updates to tangible personal property. The concerning portion was that the ruling included “support.” If support for canned software was included in the original purchase price, then the idea of the transaction including the purchase of the software and the support as part of the taxable transaction makes sense. However, looking over the original private letter ruling, it appeared that support was being construed to involve any service involving tangible personal property, which in practical terms would now tax any computer service.

The original private letter ruling provided several examples as to how support is to be construed and how it will be treated by Pennsylvania:

• Support via remote desktop where providers access and alter computer software remotely
• Telephone support that provides trouble shooting on an issue and subsequently provides a patch or module to fix the issue
• Telephone support through a help desk providing direction to correct a customer’s software issue
• Training services for the use of software
• Consulting services relating to canned software

Taxpayers and practitioners understand the basic concept of sales and use tax in Pennsylvania, which in brief is that tangible personal property is taxable unless an exemption exists and services are not taxable unless Pennsylvania specifically provides for the taxability of the service. If the true intent of Pennsylvania was to tax computer services, the taxing of computer services would have been included under taxable services. However, the language was included under what is deemed to be tangible personal property, and was meant to provide that services purchased in conjunction with the true object of the transaction (canned software) would be taxable. Services purchased separately from and without impacting the actual software should be deemed exempt.

Many were glad to hear that Pennsylvania pulled the original Private Letter and revised it on April 4, 2017, under the same citation, SUT-17-001. The revised ruling spent time directly discussing taxable support, and specifically provided the following:

Does support include consulting? – No, unless activities described as consulting fall within the definition of support. However, as this letter deals only with support and the term consulting may be used to describe various activities, this letter may not be interpreted as a definitive determination of the taxability of what taxpayers may describe as consulting.

In essence, consulting is exempt unless it isn’t! Pennsylvania still could take positions on consulting services when they can tie it directly to the maintenance or changing of a software, but at least it is not as broad as the previous version that could have taxed any type of consulting.

Pennsylvania was much more definitive with regards to whether training was included as a taxable support service. The revised ruling specifically provides that training is not a taxable support service.

At the end of the day, a more fair interpretation of taxable services is included in this Letter Ruling, but a position can still be taken by Pennsylvania that many consulting services that were previously deemed as an exempt service could be subject to tax. Based upon this uncertainty, keep all appropriate documentation on the taxability determination with regard to consulting services for computers and computer software.

Jason C. Skrinak, CPA, is the state and local tax (SALT) practice leader in the tax services group at RKL LLP. He is a member and former chair of the PICPA State Taxation Committee and frequent PICPA lecturer on state and local tax issues. He is also a member of the PICPA Fiscal Responsibility Task Force.