The Vermont Department of Taxes (the Department) recently issued draft guidance on the collection of sales tax on prewritten software accessed remotely in order to provide more clarity to taxpayers on this area of taxation. Prior to July 1, 2013, there was a legislative moratorium on the collection of sales tax on prewritten software accessed remotely.
The draft regulation provides that:
A transfer of prewritten computer software by a sale, license, subscription, lease or other means for consideration is a retail sale notwithstanding that the software is accessed remotely by the purchaser. The determination of whether there is a retail sale of the software is based on whether the use or control given the purchaser with respect to the software allows the purchaser merely the means to access the seller’s or third party’s services and/or data or whether the purchaser is able to use the software to independently perform tasks.
The draft regulation provides a list of transactions that are not taxable, factors that would indicate that a transaction is taxable (subject to the list of non-taxable transactions), and general examples of different types of transactions and whether such transactions are taxable sales of prewritten software. Some, but not all, of the transactions that the draft regulations list as being not taxable are reproduced below:
- A transaction is not taxable where the focus of the transaction is the provision of services or the transfer of intangible property rights and not the transfer of prewritten software; no separate charge is made for the transfer of prewritten software; and the value of the prewritten software transferred, including the value of services added to the prewritten software transferred, is less than 10 percent of the total charge for the transaction.
- A transaction that bundles the retail sale of prewritten software and a service is not taxable where the prewritten software is essential to the use of the service, and is provided exclusively in connection with the service, and the true object of the transaction is the service.
- The sale of data processing and information services that allow data to be generated, acquired, stored, processed, or retrieved and delivered by an electronic transmission to a purchaser where such purchaser's primary purpose for the underlying transaction is the processed data or information.
- The sale of website design and website hosting services. Such services, when performed by the seller rather than the customer, are not considered the sale of prewritten software.
- Transactions where the seller provides personal or professional services (e.g. custom software, legal, accounting).
- Transactions where the customer is running its own software, which was not obtained from the seller, on seller’s hardware in a “cloud computing” environment. This may be described as providing Infrastructure as a Service (IaaS). The IaaS business model provides the consumer with processing, storage, network capabilities, and other fundamental computing resources where the consumer is able to deploy and run software. This transaction will not be considered taxable merely because the seller of such computing resources provides access to operating system software as an incident to such services, in order to enable the customer to run its own application software.
Click here for the full text of the draft regulations. The Department is accepting comments regarding the current draft regulation until Oct. 1, 2014 at firstname.lastname@example.org or 802-828-3763. After the completion of the informal comment period, the Department plans to initiate a formal rulemaking process during which additional comments may be submitted.