Sales Tax Articles
Sales Tax State Activity Update - March 2008
Out-of-State Servers Equal Out-of-State Taxability for Hosted Software
In a letter ruling the Missouri Department of Revenue determined that fees charged to Missouri customers for hosting their software on an out of state computer servers were exempt from tax.
Facts
The taxpayer is an out-of-state corporation that develops markets and licenses Web-operable human resource management software solutions to mid-market businesses.
Applicant provides implementation, customization, and training services to its customers. The software solutions are typically offered under traditional perpetual licensing agreements under which state sales taxes are charged to the customer.
In the issue at hand the taxpayer may optionally provide system-hosting services where the licensed product is housed on Applicant's computer servers in out-of-state facilities, and accessed via the Internet by the customer.
The customer purchases the software, but then pays a monthly fee to the taxpayer for the infrastructure, 24-hour access and IT support for the software. The taxpayer hosts the application at a secure third party location and its internal IT professional staff maintains the necessary hardware and software.
Customers still pay an annual maintenance fee for support, reduced-cost services, and software updates. Hosting is defined as charging the customer a monthly rental fee for the use of taxpayer's computer servers to operate software that the customer licensed under a perpetual licensing agreement. The computer software is not delivered to the customer until the end of the contract term along with the customer data. This may be one to three years from the date of the license grant.
Issue
Are the monthly fees the taxpayer charges its Missouri customers for hosting the customers' software on its out-of-state computer servers subject to Missouri sales or use tax?
Response
Section 144.020, RS MO imposes a sales tax upon all sellers for the privilege of engaging in the business of selling tangible personal property or rendering taxable service at retail in Missouri.
The hosting of software is not one of the specific services subject to sales tax in Missouri. The taxpayer describes the monthly charges for its hosting service as the rental fee for the use of its computer servers. The description of the service as a rental may be subject to dispute since the Missouri customer maintains no physical control over the computer servers. Nonetheless, the taxpayer provides the service in another state and not in Missouri. There is no sale of tangible personal property or taxable service in Missouri that would be subject to Missouri sales tax.
The full ruling can be viewed on the Missouri Department of Revenue Website.
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