Taxing Training Services for Software – Compliance Q&A

Taxing Training Services for Software – Compliance Q&A

We field many interesting questions about sales tax. This week, we delve into the taxability of training services for software. It’s a meaty issue.

We provide training services for the software we sell. Are such services subject to sales tax in South Dakota?

This is a great question that triggers further questions. While we can’t offer specific tax advice, we can provide some useful information.

In order to determine the taxability of software training services in any state, you need to first answer key questions about the nature of your software and training.

The software

States typically base the taxability of software on the type of software it is, whether customized or off-the-shelf (canned). Taxability is also often affected by the method of delivery, whether it comes on something tangible like a CD or is electronically delivered via download. In short, in one state some software can be subject to tax while other software is exempt.

It can save you time and confusion to answer these questions about your software before you dive into a state's tax code:

  • What is the type of software:
    • Is it custom or pre-written?
  • What is the form of delivery:
    • Electronic?
    • Via physical media?
    • Via load and leave?
    • Via SaaS model?

The training

The training in question is a service. Services are generally categorized as follows:

  • Bundled services
  • Digital and informational services
  • Real property services
  • Stand-alone services
  • Tangible personal property services (generally installation, maintenance, repair)

Taxability can vary depending on the type of service: a state could classify the training in question as a stand-alone service, digital and informational service (if the training is online), or a bundled service.

In most states, services are presumed to be exempt from sales tax unless they are specifically identified as taxable by state law, regulation, or opinion. There are, of course, exceptions to that rule, and businesses are advised to consult with a tax specialist regarding the services they provide.

It can save you time and confusion to answer these questions about your training services before you dive into a state's tax code:

  • Is training associated with the sale of underlying software?
  • What is the nature of the training?
    • Are any tangible items delivered to trainees?
    • Is it conducted on-line?
    • Does it take place on-site?

Case study: South Dakota

South Dakota is one of a handful of states (the others being Hawaii, New Mexico and West Virginia) where services are presumed to be taxable. As always, there are usually exceptions to that rule.

South Dakota taxes all software, no matter how it’s delivered:

  • Canned software delivered on tangible personal property
  • Canned software that is downloaded
  • Custom software delivered on tangible personal property
  • Custom software that is downloaded

And unless there is a specific exception to the rule, training services in South Dakota are presumed to be subject to sales tax.

If you want to delve deeper into South Dakota law, check out the following

  • The Streamlined Sales Tax Taxability Matrix for South Dakota, lines 53ff, for specifics on how South Dakota sales tax applies to computer software and computer software maintenance contracts.
  • South Dakota Codified Laws, Chapter 10-45 Retail Sales and Service Tax. Specifically:
    • 10-45-4.   Tax on receipts from business services. There is hereby imposed a tax at the same rate as that imposed upon sales of tangible personal property in this state upon the gross receipts of any person from the engaging or continuing in the practice of any business in which a service is rendered. Any service as defined by § 10-45-4.1 shall be taxable, unless the service is specifically exempt from the provisions of this chapter.
    • 10-45-4.1.   Services subject to taxation. "Service means all activities engaged in for other persons for a fee, retainer, commission, or other monetary charge, which activities involve predominantly the performance of a service as distinguished from selling property. In determining what is a service, the intended use, principal objective or ultimate objective of the contracting parties shall not be controlling.

Still confused about the application of sales tax to training services for software? You’re probably not alone. Ask a question in our Q&A forum.

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