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Pennsylvania- Clarification Issued On Tax Legislation?

Monika Miles

Businesses obviously grow by selling their products outside of their local boundaries and across state lines. Pennsylvania (PA) has experienced, like most states, a relatively large amount of sales from companies outside PA, and, with that, the loss in sales tax revenue from those sales, as out of state companies do not often collect sales tax. Pennsylvania has a growing economy, and like most states, it is continually modifying its tax laws to be current with changing conditions and technologies.

Last summer, we wrote an article about a new Pennsylvania law going into effect related to taxing software that is digitally downloaded. This law went into effect on August 1, 2016.

This legislation says that licensors are now required to collect sales tax on digitally or electronically delivered or streamed video, photographs, books, any other taxable printed material, apps, games, music, any audio service including satellite radio or canned software. The law also states that these items are taxable whether they are accessed and purchased singly, or by subscription or in any other manner. Any maintenance, updates or support on these items are also taxable. This law, as written, created substantial confusion among businesses, tax professionals, and even the PA Department of Revenue (DOR).

New Letter Ruling

Just last month (February 9, 2017), PA issued a letter ruling issuing guidance about the legislation passed last summer. This letter ruling discusses to what extent “support services to prewritten computer software” are subject to taxation. Under this law all such support services to prewritten computer software are subject to state sales and use tax when transferred in a sale at retail, or made use of after being obtained in a purchase at retail. More specifically, the PA DOR hopes to clarify what is meant by “support.”

Some specific examples of taxable support services to prewritten computer software that were listed in the ruling included:

  • A vendor provides support via a remote desktop where it may access and alter the software directly,
  • A vendor provides telephone support where it may troubleshoot, discuss the issue with the customer and subsequently provide a patch,
  • A vendor distributes upgrades, patches, and/or modules to its customers,
  • A customer sends a copy of the software program to a vendor which accesses, uses or alters and then returns the corrected version of the software,
  • A vendor provides telephone support in the form of a call-in, help-desk providing direction as to the use, correction, or manipulation of the software, and
  • A vendor provides training with respect to the use, correction, or manipulation of the software.

While these simple statements may have been initially clear to the state, operating businesses and their tax consultants found that it was still extremely difficult to understand and develop practical means to comply with the law. For example, is a normal customer service call a taxable event if the cost of that customer service is supported by the original sale of the software? The letter ruling attempting to clarify this type of issue did not help.

Pennsylvania Retracts Letter Ruling

The letter ruling sparked debate due to its apparently broad interpretation of taxable support services to prewritten computer software. After a more critical review of the ruling and comments from tax practitioners, the PA DOR rescinded the letter ruling.

As happens in the state tax world in which we currently live, where technology often moves faster than state laws, PA finds itself in a quandary. In efforts to provide clarity via this ruling, the state created more discussion than it had bargained for and has subsequently pulled the ruling. It was pulled due to its confusingly broad interpretation of taxable support services to prewritten computer software. With this case of “now you see it, now you don’t” ruling, stay tuned to our blog for the latest update, when we might see it again!

Monika Miles

Monika founded Miles Consulting Group which focuses on multi-state tax consulting, helping clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.

Prior to forming the firm, Monika worked for 12 years combined in Big 4 Public Accounting and private industry. Monika has provided such services as federal and state income/franchise tax compliance and consulting, sales/use tax consulting, audit support, and credits and incentives reviews. She has served clients in a variety of industries including manufacturing, technology, telecommunications, construction, utility, retail and financial institutions.

Monika graduated from the University of Texas at El Paso (UTEP) with a BBA in Accounting/Finance and has a Masters in Taxation from San Jose State University.