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Pennsylvania Tax on Software Support Services: Ruling Re-issued

author photo of Carolynn Iafrate Kranz

In February, 2017, The Pennsylvania Department of Revenue (the “Department”) issued SUT-17-001 (2/9/2017), then withdrew the ruling from its website without comment in March 2017. The Department and has now reissued SUT-17 (4/4/2017).

The original SUT-17-001 (2/9/2017) provided that all support services (including telephone support, consulting, and training if related to canned computer software), are subject to sales and use tax. In issuing SUT-17-001 (2/9/2017), the Department noted that with Act 84 of 2016, the Legislature updated the statutory definition of tangible personal property to include video, books, applications, games, music video, canned software, and other items as well as maintenance, updates, and support. The Department further explained that it “considers the Legislature’s express inclusion of the “maintenance, updates, and support” language within the definition of tangible personal property to operate as rendering all such services to canned computer software as being subject to tax. Specifically, the Department considers any support involving the access to, use of, or alteration of the software itself as constituting a taxable component of the transaction.” The Department also noted that technical support, consulting and training related to canned computer software were also subject to sales tax. In March 2017, SUT 17-001 was quietly removed from the Pennsylvania Department of Revenue website. It is our understanding that the ruling was pulled as a result of complaints that the Department’s interpretation of Act 84 of 2016 was overly broad and went beyond the intent of Act 84.

In the reissued SUT-17-001(4/4/2017), the Department steps back from its original pronouncement that consulting and training constitute taxable “support” services. Rather, the Department provided clear guidance that training would not be considered taxable support services. However, the Department has muddied the water when it comes to consulting by explaining that that “support” does not include consulting unless it falls within the definition of “support.” The problem is that the Department’s definition of “support” is quite broad and like most things is subject to interpretation. The Department explained that it “considers ‘support’ to mean, the providing of advice or guidance concerning otherwise taxable digital or electronic tangible personal property. This definition includes identifying the source of problems affecting the usability of the property and/or attempting to place the property in or restore the property to a useable state. This includes, but is not limited to what is commonly referred to as help desk support or call center support. The support may be delivered verbally, online, or through automated means that reside on customer’s device or by human means.”

Software support has historically been considered exempt in Pennsylvania, unless such support was mandatory with the sale of taxable software, or bundled with the sale of taxable updates or bug fixes, which is customary in the software industry.

Undoubtedly, the Department’s position regarding when “consulting” constitutes taxable “support” will result in prolonged challenges between taxpayers and auditors. Vendors should be proactive and mindful of the Department’s definition of “support” and provide succinct descriptions of what their “consulting” services involve in their services agreements and/or invoices to avoid being improperly subject to sales tax.

Carolynn is the founder and Managing Member of Industry Sales Tax Solutions, LLC (“ISTS”), which offers a subscription database containing the sales and use taxability of software related transactions, digital content and cloud services; she is also the Managing Member of Kranz & Associates, PLLC, a boutique law firm specializing in state and local tax consulting. See Carolynn's AUTHOR page in order to send a message and/or consultation request.

Other recent “Cloud, Software & Digital Tax” posts by Carolynn Iafrate Kranz:

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