Effective August 1, 2016, the Pennsylvania Legislature expanded Pennsylvania’s sales tax base by amending the definition of “tangible personal property” to include 10 enumerated digital goods, among them music, books, video, apps, and streaming services.1 The amended statute also clarified that digital goods are taxable, regardless of the method of delivery or manner of billing. Specifically, digital goods sourced to Pennsylvania are taxable:
whether electronically or digitally delivered, streamed or accessed and whether purchased singly, by subscription or in any other manner, including maintenance, updates and support.2
Based on the plain language of the statute, it does not appear that the Legislature intended to impose a tax on “maintenance, updates, or support.” Rather, the statutory language clarifies that the 10 defined digital goods are taxable even when they are purchased as part of a transaction characterized as a provision of “maintenance, updates, and support.” So, for example, a sale that a vendor invoices as a sale of “software maintenance and support” would be taxable if the maintenance and support actually includes the delivery of a new version of canned software.
However, in February 2017, the Pennsylvania Department of Revenue (the “Department”) issued Letter Ruling SUT-17-001, which provided guidance regarding the Department’s interpretation of how the amended statute applied to “support services.” The ruling surprised many taxpayers by concluding that the amended statute imposed sales tax on a wide variety of software support services, including IT help desk services, and many software consulting and training services.3 However, within a month of publication, the ruling was removed from the Department’s website and the Department indicated that a revised version would be issued.
Last week, the Department issued a revised version of the ruling.4 The new version reverses several of the conclusions reached in the original version of the ruling. However, the revised ruling continues to reflect the Department’s position that the amended statute broadly subjects support services to Pennsylvania sales and use tax.5 As noted above, we believe this broad interpretation goes beyond the statutory language.
Support services generally
In the revised ruling, the Department broadly defines taxable “support” to include “advice” or “guidance” regarding software, and specifically states that tax is imposed on “help desk support or call center support” services.6 This includes support services provided by a third-party vendor that did not sell the software that is the subject of the support service. It also includes IT help desk services, where the support is only delivered “verbally.” The ruling then declares that “[p]roviding support is taxable….” The ruling, therefore, treats “support” as if it were one of the 10 enumerated taxable items.
Our view is that this broad interpretation of “support” goes beyond the scope of the amended statutory language. Taxpayers that are charged sales tax on any of the following types of transactions may be eligible for a refund:
- IT help desk and call center services purchased from a vendor other than the provider of underlying software
- Separately stated IT help desk and call center services for phone/online support, instruction, and software patches
- Support and maintenance contracts that provide for phone support and software patches, but not new versions of canned software or software upgrades
- Again, in our view, “support” is only taxable under the statute if it is a method of purchasing (that is, acquiring for consideration) one of the 10 enumerated taxable items.
Consulting and training services
The revised ruling does make two taxpayer-friendly changes to the Department’s original conclusions. First, the Department has reversed its conclusion that taxable “support” services include training services. The revised ruling specifically states that the definition of support does not include “training.”7
Second, the Department has revised its determination that taxable support services include any “consulting” services related to canned software. The Department’s original determination that such services were taxable was particularly alarming to taxpayers, because it appeared to indicate that the Department viewed any software consulting services as taxable. In the revised ruling, the Department acknowledged that the term “consulting” can encompass a wide variety of services that often do not fall within its definition of “support.” In the revised ruling, the Department states that only consulting services that meet the definition of “support” are taxable under the reasoning of the ruling. (Although the Department did leave open the possibility that other types of consulting could be subject to tax.)
Opportunity for services to software delivered in a tangible form?
One interesting aspect of the Legislature’s amendment to the sales tax statute is that it only applies to items that are electronically or digitally delivered, or “streamed or accessed.” The amendment does not mention software delivered in a tangible form (i.e., delivery on disk or via load-and-leave). As a result, even if the Department’s interpretation of the amendment is correct, and software support services for digitally delivered items are taxable, that determination should not apply to services to software delivered by disk or load-and-leave. Similarly, the treatment of software maintenance arguably remains non-taxable8 as long as it relates to canned software delivered on a disk.
Takeaway
Many taxpayers that are paying tax on purchases of software-related support and maintenance will have a refund opportunity, especially on purchases of traditional IT help desk and call center services, as well as any software or support services related to purchases of canned software delivered on a disk or by load-and-leave. In addition, if Pennsylvania sales tax is paid on the full purchase price of a taxable software-related service, the purchaser may be eligible for a refund to the extent that the software is used by employees or third-party users located outside Pennsylvania.
For taxpayers interested in seeing all the revisions, a redline showing the changes to the original version of Letter Ruling SUT-17-001 made in the revised version of the ruling published last week can be found here.
- Act 84 of 2016, HB 1198
- 72 P.S. § 7201(m)(2)
- Pennsylvania Department of Revenue Letter Ruling SUT-17-001 (February 9, 2017).
- Pennsylvania Department of Revenue Letter Ruling SUT-17-001 (revised April 4, 2017).
- The revised ruling provides that “Providing support is taxable regardless of the method of billing.” The ruling does not limit the “support” to “support” that includes the purchase of one of the 10 enumerated taxable services.
- Pennsylvania Department of Revenue Letter Ruling SUT-17-001 (revised April 4, 2017).
- Pennsylvania Department of Revenue Letter Ruling SUT-17-001 (revised April 4, 2017).
- Dechert LLP v. Commonwealth, 998 A.2d 575, FN 3 (Pa. 2010).
Client Alert 2017-102
