Is SaaS Taxable in Utah?
Short answer: Generally, yes, when the customer uses remotely accessed prewritten software in Utah. The Utah State Tax Commission expressly includes hosted software, application service provider (ASP) software, SaaS, and cloud applications in its remotely accessed software guidance. The server’s location does not, by itself, decide whether the charge is taxable.
How does Utah distinguish prewritten and custom software?
The Tax Commission’s Publication 64 describes prewritten software as software created for general sale rather than for one customer’s particular needs. Charges for using prewritten software in Utah are generally taxable whether the product is boxed, downloaded, or hosted.
Custom software is written for a specific customer’s needs. The commission says charges to sell, rent, lease, or use custom software are not taxable; maintenance, support, and upgrades for that custom software receive different treatment as well. Adding a customer name or account number to an existing program does not, on its own, turn prewritten software into custom software. Sellers should examine how the product was developed and what the contract actually promises.
What if the cloud server is outside Utah?
A Utah customer’s use can still be taxable. Publication 64 gives an example in which a seller provides access to prewritten software through servers outside Utah and a buyer at a single Utah location purchases that access. A seller with a Utah collection obligation collects tax at the buyer’s location.
Consider a Utah business whose employees log in to a vendor-hosted, generally available project-management application. The vendor may operate servers elsewhere, but the Utah use of the prewritten software generally brings the subscription within Utah’s software tax guidance.
How is a subscription used in several locations handled?
When remotely accessed software is used at more than one location, the buyer may provide the seller with a reasonable and consistent allocation method at the time of the transaction. The seller then sources the relevant portions to those locations. The Tax Commission gives allocation by the number of employees using the software in each location as one possible method. Without a buyer-provided allocation method, the seller must source the transaction to the buyer’s address. A qualifying buyer with a direct pay permit may handle payment directly under the applicable rules. (Publication 64)
Contracts, user counts, location records, and the buyer’s allocation instructions help support the amount assigned to Utah.
Why does the 2009 ruling say something different?
Private Letter Ruling 09-003 addresses specific transactions occurring on or before December 31, 2008. On those facts, it concluded that the subscription fees were not subject to Utah sales tax. It is a historical, fact-specific ruling. A current sale should be evaluated using today’s law and the Tax Commission’s software guidance, including the rules for prewritten software used in Utah.
Which rate and invoice treatment apply?
Utah’s combined sales tax rate varies by location. Use the Tax Commission’s rate lookup for the applicable place and date. When a sale contains taxable software and nontaxable items, the commission generally requires the charges to be documented separately on the invoice or in the seller’s records. Certain qualifying installation or modification charges must be separately stated on the invoice to receive nontaxable treatment.
For a SaaS offering, confirm whether the software is prewritten or custom, where it is used, whether use must be allocated among locations, how charges are documented, and which combined rate applies.
Sources: Utah State Tax Commission, Publication 64: Sales Tax Information for Computer Service Providers and Sales & Use Tax Rates; historical reference, Private Letter Ruling 09-003.