The Idaho Sales Tax Rules Committee is currently revising Rule 027, Computer Equipment, Software, and Data Services, in response to the passage of H.B. 598. The Committee met for the last time on July 24 to discuss the draft rule prior to the promulgation of the proposed rule.
As previously discussed in Inside SALT, the passage of Idaho H.B. 598 has resulted in the exclusion from the definition of tangible personal property of “computer software that is delivered electronically; remotely accessed software; and computer software that is delivered by the load and leave method where the vendor or its agent loads the software at the user’s location but does not transfer any tangible personal property containing the software to the user.” However, “computer software that constitutes digital music, digital books, digital videos and digital games” is included within the definition of tangible personal property.
The discussion draft of Rule 027, released prior to the meeting, added new definitions for ‘canned software,’ ‘computer program,’ ‘computer software,’ ‘custom software,’ ‘digital product,’ ‘information stored in an electronic medium,’ ‘load and leave method’ and ‘remotely accessed computer software.’ As of the July 24 meeting, the definition of ‘delivered electronically’ was still under discussion.
The draft rule interprets H.B. 598 to assist taxpayers in identifying transactions subject to Idaho sales tax. Following are items addressed by the draft rule:
- The draft identifies streaming digital music, books and videos as subject to Idaho sales tax.
- The draft explains that if canned software is loaded onto a user’s computer but has minimal or no functionality without connecting to the provider’s servers, it may be taxable based upon the delivery method of the canned software.
- Online or remote data storage on storage media owned and controlled by another party is a nontaxable service.
- Where the seller purchases raw data, expends time and resources to “clean up” the raw data into a usable format and charges customers for the right to use the data for a specified period of time, and the customers only have access to the full data over the internet, the charges are not taxable.
- Digital games are treated by the draft rule as tangible personal property, and thus taxable, regardless of the method of access or delivery and regardless of whether the digital game requires the internet for some or all of its functionality.
- Periodic charges to play games that require a constant connection over the internet to a remote server and periodic charges for a gaming service that enables certain functionality are taxable.
- While the rule imposes sales tax on the purchase of virtual currency that enables additional content or progress in a digital game, it will not address the purchase of virtual currency used to purchase digital products such as video games, digital videos or apps.
- The draft rule addresses the taxability of maintenance contracts. The original rule is revised to impose tax on mandatory maintenance contracts only if the software to which the contract applies is subject to tax. Sales tax is imposed on fees for upgrades from optional maintenance contracts only where the upgrades are delivered on storage media. Where an optional software maintenance contract provides for software updates to be delivered electronically but also allows a customer to receive software updates on storage media, no portion of the contract is taxable unless the customer actually receives software updates on storage media.
- The draft rule also addresses the taxability of digital subscriptions. Digital subscriptions granting access to a database of digital music, books or videos are taxable regardless of the method of access or delivery. However, subscription charges to digital newspapers, magazines or other periodicals, or to online research databases are not taxable.
We have received reports that the July 24 rule-making meeting did not result in any significant changes to the state’s draft taxability matrix. It is expected that there will not be any further rule-making meetings, that the Committee will finalize the proposed rule by August 29 and publish it in the October Administrative Bulletin. The proposed rule will then be subject to a three-week comment period. The effective date of the final rule will likely be in March or April 2015.