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Rhode Island to start sales, use tax on ‘software as a service’

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On Oct. 1, 2018, Rhode Island will begin imposing its 7% sales and use tax on software as a service (SaaS) items. This change was included in the state’s budget legislation that was enacted on June 22, 2018.1 The Rhode Island Division of Taxation recently has issued guidance clarifying the implementation of this tax.2

Imposition of tax For transactions on and after Oct. 1, 2018, the sale, storage, use, or other consumption of vendor–hosted prewritten computer software,3 including SaaS, will be subject to 7% sales and use tax.4 The division’s guidance clarifies that the new law applies to software for accounting, invoicing, human resources, payroll, sales tracking, and a number of other functions.

According to the division’s guidance, examples of taxable purchases include:

  • A paid subscription to software programs providing digital tools for office work (including spreadsheet programs, programs to create overhead presentations, and programs to create written documents).
  • Programs purchased and accessed or used online to handle payroll, accounting, human resources and other like functions.
  • Programs purchased and accessed or used online to manage the books of the purchaser’s business.
  • Programs purchased and accessed or used online to handle customer relationship management (CRM) operations.
  • Online dating services purchased and used or accessed online, including through dating applications accessed or used on a computer, phone, or other device.
  • Job search programs purchased, or a social media program purchased to link the user to other professionals.

In general, the vendor will be responsible for collecting and remitting the tax. Currently unregistered vendors must register with the division, obtain a sales permit, and collect and remit sales and use tax. Vendors may register directly with the division or via the Streamlined Sales Tax Registration System. If the vendor does not charge the sales and use tax, the consumer (individual or business) will be responsible for paying the tax.

Commentary Rhode Island’s decision to impose sales and use tax on SaaS items may affect many businesses and individuals because the tax applies to a wide variety of frequently used software. As noted in the division’s guidance, tax will be imposed on software accessed over the Internet even if it is not downloaded or permanently used. The enactment of this legislation follows efforts in other states to address the taxation of SaaS, including neighboring states such as Massachusetts, Connecticut and New York.

In Massachusetts, charges for the access or use of software on a remote server are generally subject to tax.5 However, tax does not apply where there is no charge for the use of the software and the object of the transaction is acquiring a good or service other than the use of the software.6

Connecticut has no specific authority concerning the taxability of SaaS, but software delivered electronically and data processing services are taxable at a 1% rate that is much lower than the standard Connecticut sales tax rate applied to most taxable transactions.7

New York law does not specifically address the treatment of SaaS for sales tax purposes, but The New York Department of Taxation and Finance has considered the taxability of a company’s computer software that allowed customers to upload an image onto the company’s servers and manipulate the image to show various colors and views.8 According to the department, the company’s charges for use of its software were receipts from the sale of prewritten computer software. As a result, the sale of a license to use the product to a customer in New York was subject sales tax because it constituted a transfer of the software.

 



1  H.B. 7200, Laws 2018.
Advisory 2018-38, Rhode Island Division of Taxation, Sept. 4, 2018.
3  Vendor-hosted prewritten computer software is defined as prewritten computer software that is accessed through the Internet and/or a vendor-hosted server regardless of whether the access is permanent or temporary and regardless of whether any downloading occurs. R.I. GEN. LAWS § 44-18-7.1(g)(vii).
4  R.I. GEN. LAWS §§ 44-18-7; 44-18-8; 44-18-15(a); 44-18-20(a), (f); 44-18-21(a); 44-18-22; 44-18-23; 44-18-25; 44-19-7. The Division’s guidance explains that in general, the term “prewritten computer software” means computer software, including prewritten upgrades, which is not designed and developed by the author or other creator to the specifications of a specific purchaser. Prewritten computer software delivered electronically or by “load and leave” became subject to Rhode Island sales and use tax on Oct. 1, 2011.
5  MASS. REGS. CODE tit. 830, § 64H.1.3(14)(a). See also Letter Ruling 12-10, Massachusetts Department of Revenue, Sept. 25, 2012.
Id. See also Letter Ruling 11-4, Massachusetts Department of Revenue, April 12, 2011.
7  CONN. GEN. STAT. §§ 12-407(a)(37); 12-408(1)(D); 12-411(1)(E); Policy Statement 2004(2), Connecticut Department of Revenue Services, Oct. 21, 2004.
TSB-A-08(62)S, New York Commissioner of Taxation and Finance, Nov. 24, 2008.



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