The Pennsylvania Department of Revenue (DOR) released two separate letter rulings during 2017 that provide guidance on the sales and use tax treatment of information retrieval services and support services related to computer software. The DOR concluded that both are subject to tax based on its interpretation of Act 84, the budgetary legislation enacted in July 2016. These rulings are concerning, since it is questionable whether DOR’s positions are consistent with the statute and the legislative intent of Pennsylvania lawmakers.
Act 84 and Act 43
Numerous computer services had been subject to sales and use tax in Pennsylvania from Oct. 1, 1991, until July 1, 1997, when legislation repealed the taxation of computer programming, integrated systems design, data processing, information retrieval, and other related services.1
The rescinded regulation on computer services had defined information retrieval as “providing data through a computer to either an online or remote computer or peripheral equipment upon request.”2
In July 2016, the Pennsylvania legislature enacted budget Act 84 (effective Aug. 1, 2016), which expanded the scope of tangible personal property to include canned computer software and other digital products.3
Act 84 amended the definition of tangible personal property to include videos, books, “any otherwise taxable printed matter,” applications, games, music, audio, canned software, and, as a catchall, “any other otherwise taxable tangible personal property electronically or digitally delivered, streamed, or accessed.”4
Such products are subject to tax, “whether electronically or digitally delivered, streamed, or accessed, and whether purchased singly, by subscription, or in any other manner.” The definition also included “maintenance, updates, and support” related to such property, but these terms were not specifically defined.5
On Oct. 30, 2017, the legislature enacted Act 43, the revenue component of the 2017-2018 budget. This legislation further amended the definition of tangible property to include support related to canned software only, excluding “separately invoiced help desk or call center support.”6
Support services related to other digital property are no longer subject to tax.
In February 2017, the DOR issued Letter Ruling SUT-17-001, concluding that the term “support” comprised a wide range of support services for canned software and digital property, including IT help desk services as well as consulting and training.7
Within a month of publication, the DOR removed the ruling from its website in response to complaints that the ruling exceeded the scope of DOR’s authority.
The DOR released a revised ruling in April that scaled back several conclusions reached in the first version.8
“Support” was defined as “the providing of advice or guidance” concerning digital property or software, including “identifying the source of problems affecting the usability of the property” or attempting to place or restore the property to a usable state. The DOR concluded that support services are subject to tax, whether delivered verbally, online, or through automated or human means. Specific examples of taxable support services were provided, noting that the most common forms include help desk, call center, and technical support. The ruling specified that certain consulting services may still be taxable should they fall within the definition of “support.”
In light of the October budgetary legislation, DOR’s interpretation of “support” should apply to canned software only. Further, separately invoiced help desk or call center support services related to canned software are not subject to tax.
This past August the DOR published Letter Ruling SUT-17-002, in which it concluded information retrieval to be taxable – the first time since the tax on computer services was repealed on July 1, 1997. A taxpayer had sought guidance as to the treatment of its information retrieval “product,” a subscription-based online research service used by professionals in a variety of industries, including accounting, finance, and law.9
The DOR ruled that the online research service constituted tangible personal property under its reading of the statute, concluding that subscribers, by using the product’s search functions, exercised a license to access canned computer software and exercised power and control over such software. The DOR also noted that subscribers use the research service to electronically access tangible personal property, as defined under the catchall provision of Act 84. Thus, the DOR found the sale of information-retrieval products to be the grant of a conditional license to use tangible personal property.10
These positions on support services and information retrieval arguably are the result of hasty enactment of Act 84 in July 2016. The Pennsylvania House and Senate had approved the spending side of the 2016-2017 budget, and sent it to Gov. Tom Wolf on July 1, 2016. The governor took no action, but after a 10-day lapse the bill automatically became law on July 12, 2016. This put pressure on the legislature to immediately pass a revenue bill to complement the spending bill because Pennsylvania has a constitutional balanced budget requirement. As a result, the legislature had limited time to fully define many of the terms added to the definition of “tangible personal property” in Act 84 or to provide examples. The DOR was left to interpret these terms.
Both of DOR’s letter rulings demonstrate an expansive application of the term “tangible personal property.” Ruling SUT-17-001 sets forth a broad definition of taxable support services for canned software. Basically, any sort of verbal advice or guidance regarding canned software, whether delivered by the vendor or a third-party provider, potentially could be considered taxable support, based on the DOR’s position. At the same time, the ruling fails to draw clear distinctions between taxable support services and nontaxable consulting services, merely noting that consulting could encompass “a wide variety of activities.” Informal DOR guidance has been unclear as to whether software implementation services are nontaxable consulting or taxable support.
With Ruling SUT-17-002, the DOR seems to be saying it has the authority to tax electronic information retrieval (whether referred to as a “product” or a “service”) by looking to the underlying content that is the object of the service being provided, as opposed to looking at the item for what it is – a service. In years past, the Pennsylvania legislature felt it necessary to specifically define electronic information retrieval as a taxable computer service. The legislature did not do so in Act 84, leaving open its intent. In the absence of clear intent, the DOR has stated its position and administratively defined information retrieval as a form of tangible personal property.
It is possible that the DOR could expand its interpretation of tangible property to include similar other services, such as other computer-generated information services, the digitally delivered output of data processing services, or web design services. The DOR recently added an Aug. 3, 2017, enforcement date to this letter ruling, which is the date the ruling was posted to DOR's website. Previously, based on informational guidance from the DOR, the ruling would have applied retroactively to the sale of information retrieval dating back to Aug. 1, 2016, the effective date of Act 84.
Plenty of questions remain regarding the extent of DOR’s authority to tax support services and information retrieval. Taxpayer challenges are likely to occur before more clarity is provided. Until then, businesses affected by these rulings should begin weighing the business considerations of remitting a 6 percent to 8 percent tax on support services and information retrieval. This includes analyzing potential exposure resulting from purchases or sales of these services made during open periods under the statute of limitations, and considering any potential tax and financial statement impact.
1 Former 72 Pa. Stat. Sections 7201(dd)-(ii); Former 61 Pa. Code Section 60.13.
2 Former 61 Pa. Code Section 60.13(a).
3 72 Pa. Stat. Section 7201(m)(2).
4 Id. Previously, canned software was considered to constitute tangible personal property. 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 Section 60.19(c)(2)(i).
5 72 Pa. Stat. Section 7201(m)(2).
6 72 Pa. Stat. Section 7201(m)(2)(ix).
7 Pa. Dept. of Revenue, Letter Rul. No. SUT-17-001, Feb. 9, 2017.
8 Pa. Dept. of Revenue, Revised Letter Rul. No. SUT-17-001, April 4, 2017.
9 The ruling never refers to the taxpayer’s product as an information retrieval “service.”
10 The information retrieval services described in SUT-17-002 should not be confused with information retrieval services that qualify as nontaxable “enhanced telecommunications services.” Such information retrieval services are defined as the retrieving of data or information to either an online or remote computer or peripheral equipment. The service includes charges for fees for connection, computer time, usage transmission, or content of information. See Pa. Dept. of Revenue, Sales Tax Bulletin 2005-03, Sept. 30, 2005.
Jerry Glynn, CPA, is managing director, state and local taxes, for Grant Thornton LLP in Philadelphia. He can be reached at email@example.com.
Patrick K. Skeehan, JD, is manager, state and local taxes, for Grant Thornton LLP in Philadelphia. He can be reached at firstname.lastname@example.org.