LR 4725

Customized Training Software Fees

May 14, 2008

Dear Applicant:

This is a letter ruling issued by the Director of Revenue pursuant to Section 536.021.10, RSMo, and Missouri Code of State Regulations 12 CSR 10-1.020 in response to your letter dated March 11, 2008.

The facts as you presented them in your letter are summarized as follows:

Applicant is an out of state business that specializes in providing customized training software for businesses. Software modifications and updates are performed by an affiliated company owned by Applicant. The training software resides on a server located in another state, which Applicant’s customers have access through the Internet. Applicant inquires as to whether the customized training software or various fees charged to its customers are subject to sales or use tax. The various fees charged to Applicant’s customers are listed as follows:

1. Registration fee - a fee that is charged to a customer to set up a user with a username and password;
   
2. Monthly license fee - a fee that is charged to a customer for the use of the software residing on its server that includes user access. The fee also includes 24/7 customer support services;
3. User license fee - a fee charged per user of the software. This is an additional charge added to the monthly licensing fee;
4. Hosting fee - a fee for hosting the software on the server for the company;
5. Customer service fee - a fee billed for time and materials used out of state;
   
6. Travel expense - reimbursement of travel expenses;
   
7. Module development and build fee - a fee for the customization of software to meet the customer’s specific needs and requests. This is done by an affiliated company out of state;
8. Proof of concept fee - a consulting fee for consulting with employees and staff, showing how the software can be utilized, and gathering information and specifications on the customers needs; and
9. Pilot program testing fee - a fee for testing the software on employees as a demonstration of effectiveness.

ISSUE:

Are the fees listed in 1 through 9 subject to sales or use tax?

RESPONSE:

No, the fees listed in 1 through 9 are not subject to Missouri sales or use tax.

Section 144.020.1, RSMo, imposes a sales tax upon all sellers for the privilege of engaging in the business of selling tangible personal property at retail in Missouri. Missouri use tax is imposed under Section 144.610, RSMo, on the privilege of storing, using or consuming within Missouri any article of tangible personal property.

Section 144.020.1(4), RSMo, imposes a tax on the “basic rate paid or charged on all sales of local and long distance telecommunications service to telecommunications subscribers and to others through equipment of telecommunications subscribers for the transmission of messages and conversations.” The section also imposes a tax “upon the sale, rental or leasing of all equipment or services pertaining or incidental thereto; except that, the payment made by telecommunications subscribers or others, pursuant to section 144.060, and any amounts paid for access to the Internet or interactive computer services shall not be considered as amounts paid for telecommunications services.”

Section 144.010.1(3) RSMo, defines “Telecommunications service” as:

[T]he transmission of information by wire, radio, optical cable, coaxial cable, electronic impulses, or other similar means. As used in this definition, "information" means knowledge or intelligence represented by any form of writing, signs, signals, pictures, sounds, or any other symbols. Telecommunications service does not include the following if such services are separately stated on the customer's bill or on records of the seller maintained in the ordinary course of business:

(a) Access to the Internet, access to interactive computer services or electronic publishing services, except the amount paid for the telecommunications service used to provide such access;

There is no sale of tangible personal property in Missouri that would be subject to Missouri sales or use tax. The Missouri customer accesses the service only by way of the Internet. In addition, Applicant's computer servers are located out of state. There are no articles of tangible personal property related to Applicants hosting service being used, stored, or consumed in Missouri. The sale of the service is also not a taxable service in Missouri and, therefore, not subject to tax.

This letter ruling is binding upon the Department of Revenue with respect to the Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals. If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change. For this reason, the interpretation set forth above should be reviewed on a regular basis. Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.

Should additional information be needed, please contact Senior Counsel Gary Barnhart, Office of General Counsel, Post Office Box 475, Jefferson City, Missouri 65105-0475 (phone 573-751-0961), or me.

Sincerely,

Omar D. Davis