nd yo Be d an es ic v er S to ts ge id W om Fr

Sales Tax-

Sponsored by Avalara, Inc.

Copyright 2013

The Beyond: Non-Traditional Services in the Sales Tax World

The U.S. sales tax system has transformed from a widget, aka tangible personal property, focus to a widgets-and-services focus. First, traditional services such as repairs, property maintenance and personal services began to be taxed in states. Now, other classes of services, referred to as non-traditional services, are being delivered more and more regularly in our modern economy, making them a new target for states to consider regarding taxation. Non-traditional services raise their own set of questions for businesses owners concerned with taxability of the services they provide. Nontraditional services include: Data Processing Information Services Software-Related Services The treatment of non-traditional services are guided by state regulations, interpretive documents and rulings such as private letter rulings, informational publications or bulletins, and even by administrative tribunal decisions. The authority conferred by these types of interpretations is limited to a single state or jurisdiction. Unfortunately, the lack of uniformity amongst the states results in great variances from state-to-state when defining what is taxable and what is not in the non-traditional services world.

Page 2 of 7. Sales Tax From Widgets to Services and Beyond Avalara 2013

Data Processing
With the advent of cloud computing, raw data is rarely passed to consultants via hard copy mediums

According to the Collins English Dictionary, data processing is defined as a sequence of operations performed on data, esp. by a computer, in order to extract information, reorder files, etc.1 Some states do not specifically define data processing in their rules and regulations. Of those states that do provide a definition of data processing, they often tend to elaborate on the Collins plain English definition. Some states or jurisdictions apply a more complex definition, as in the case of our nations capital: the processing of information for the compilation and production of records of transactions; the maintenance, input, and retrieval of information; the provision of direct access to computer equipment to process, examine, or acquire information stored in or accessible to the computer equipment; the specification of computer hardware configurations, the evaluation of technical processing characteristics, computer programming or software, provided in conjunction with and to support the sale, lease, operation, or application of computer equipment or systems; word processing, payroll and business accounting, and computerized data and information storage and manipulation; the input of inventory control data for a company; the maintenance of records of employee work time; filing payroll tax returns; the preparation of W-2 forms; the computation and preparation of payroll checks; and any system or application programming or software. 2 As is evident from the Washington D.C. statute, a states definition of data processing may be very broad. However, in Texas, the states rules and regulations define two specific types of data processing servicesthose that are taxable and those that are not. Some of the taxable data processing services in Texas3 include: Accounts receivable billing Check preparation Data conversion services Preparing W-2 forms, payroll tax returns and payroll checks Transcription services Word processing services Scanning documents

http://www.collinsdictionary.com/dictionary/english/data-processing D.C. Code Ann. 47-2001(n)(1) 3 http://www.window.state.tx.us/taxinfo/taxpubs/tx96_259.pdf

1 2

Page 3 of 7. Sales Tax From Widgets to Services and Beyond Avalara 2013

And a few examples of the non-taxable data processing services in Texas are: Preparation of financial statements Preparation of federal income tax returns Transcription of medical dictation or records Consulting services Auditing services including inventory counting services Interpreting a clients data

Heading north, the focus in Minnesota regarding data processing is on the nature of the product delivered to the retail customer. In the land of 10,000 Lakes, tax [generally] applies to the conversion of customerfurnished data from one physical form of recordation to another.4 Minnesotas definition also broadly defines data processing services that are not taxable: Nontaxable Services. A. Processing a clients data means the developing of original information from raw data furnished by the customer. Examples of automatic data processing operations which result in original information are summarizing, computing, extracting, sorting, and sequencing. Such operations also include the updating of a continuous file of information maintained by the customer with the service bureau. 5 Adding to the confusion is the rate of change in the data processing field via technology, software capabilities and the expanding complexity of data streams. For states still hampered by outdated laws and regulations in this field, the ability of vendors to establish certainty is even more precarious. Many states struggle with an outdated concept of taxable data processing based on the exchange of a physical medium. With the advent of cloud computing, raw data is rarely passed to consultants via hard copy mediums and converted or analyzed data is usually returned via the cloud or email. The ability to identify taxable data processing services becomes difficult, even for the states own employees.

4 5

Minn. R. 8130.9700 Subp. 3 (D). Minn. R. 8130.9700 Subp. 4 (A).

Page 4 of 7. Sales Tax From Widgets to Services and Beyond Avalara 2013

Information Services

Information Services, broadly defined, is access to otherwise compiled or organized information. These transactions are often taxable, but not always taxable under the same regime state-by-state. Identifying taxable Information Services suffers from similar challenges as found with data processing. Information Services, even when clearly defined as such, may be subject to multiple categorizations across many states. In Ohio, Information Services are taxed as though they were data processing services. In Texas, the same Information Services are taxed as a true Information Service. In other states, the dividing line between taxable Information Services and exempt services is even less clear. For example, Oklahoma specifically taxes information bureaus, but only those that provide output in a tangible form. In Florida, the compilation of research is taxable as an Information Service, but charges for compiling news articles is not. As an example, lets consider a vendor who provides information to customers over the Internet. In Texas, the vendor is selling a form of Information Services for sales tax purposes, but they are only subject to 80% tax.6 In Ohio, the vendor is selling electronic Information Services for sales tax purposes and taxed at 100% of value.7 In North Dakota, sales of statistical reports, graphs, diagrams, microfilm, microfiche, photo recordings, or other information produced or compiled by a computer and sold in substantially the same form as it is produced, are generally taxable under the computer software category, while the electronic transmission of information, including mailing lists and statistical information, prepared for multiple customers, is not subject to sales tax.8 In other states, the same services may be characterized as professional or consulting servicesand yet the vendor is selling exactly the same service to every customer. The bottom line: Determining whether Information Services falls under taxable services is an inexact science that leaves many pitfalls for the unwary and even for the well-prepared.

Tex. Admin. Code 3.342(a)(2). Ohio Rev. Code Ann. 5739.01(Y)(1)(c) 8 N.D. Admin. Code 81-04.1-03-11(6)(e)
6 7

Page 5 of 7. Sales Tax From Widgets to Services and Beyond Avalara 2013

Software-Related Services

State governments put a lot of emphasis on the term related for services that bear a relationship to software. Items such as training, maintenance, updates or technical support are generally considered related to software in states where software is taxable. Of course, states that do tax software-related services usually only tax services connected to pre-written or canned software. However, even in the canned software space, the states diverge sharply when it comes to taxability of specific services attendant to prewritten software. In Minnesota, software-related charges for consultation, installation and configuration are taxable whether the actual work is done by the software vendor or not.9 On the other hand, Missouri exempts softwarerelated services which are not mandatory to the customer, regardless of who performs the actual services.10

10

Minnesota Sales Tax Fact Sheet 134, 02/01/2004 Mo. Code Regs. 10-109.050(3)(F)

Page 6 of 7. Sales Tax From Widgets to Services and Beyond Avalara 2013

What Can Non-Traditional Services Depend On?

For providers of modern data processing, information and software-related services, the sales tax environment presents many challenges. Proper identification of the services your company provides is a critical step to achieving accurate sales tax compliance. Proper identification begins with naming your service appropriately for its intended purpose and understanding the tax implications of that categorization. Depending on the state where your company has physical presence (nexus), your business must research existing laws and proposed laws as they relate to the services you provide. Remember, especially in the fast moving world of technology, just because your companys services are not taxable today does not mean they will remain exempt tomorrow. With recognition of the new non-traditional services fields, services have gained a higher profile amongst the many states rules on taxability. With the increased attention and effort on the states parts to tax non-traditional services, reaching out for sales and use tax assistance from experts to help classify how your service is treated can protect your company against a damaging tax audit. And always remember, as your company expands into new states, always check the laws in that state regarding your service.

When all is said and done, why risk non-compliance? Learn more about AvaTax today. AvalaraMaking sales tax less taxing.

Author:
SHANE RATIGAN began his career as a self-employed business owner. After 10 years in the motorcycle business, he returned to college to gain a Bachelors in Accounting and a Bachelors in Business Administration. He went on to earn his Juris Doctorate at Syracuse University College of Law in New York and his LLM Masters of Taxation at the University of Washington in Seattle. Shane has spent several years counseling small business owners on tax and succession planning. He is a licensed attorney in Oregon and Washington. Shane currently works in sales tax law and sales tax compliance with Avalara, a Software-as-a-Service end-to-end sales tax solution for businesses of all sizes. . Learn more about AvaTax today. AvalaraMaking sales tax less taxing.
Page 7 of 7. Sales Tax From Widgets to Services and Beyond Avalara 2013

Avalara may have patents, patent applications, trademarks, copyrights, or other intellectual property rights governing the subject matter in this document. Except as expressly provided in any written license agreement from Avalara, the furnishing of this document does not give you any license to these patents, trademarks, copyrights, or other intellectual property.