Mississippi is taxing more cloud computing services
Should internet-based computer software products and services be subject to sales and use tax in Mississippi? Should online computer software products be taxed the same whether the vendor is based in Mississippi or located out of state? In the coming months, Mississippi’s new Taxation of Remote and Internet-based Computer Software Products and Services Study Committee will set out to answer these questions and recommend a course of action.
The committee is tasked with studying Mississippi’s current sales and use tax treatment of remote online computer software products then recommending which, if any, of these products and services should be taxed. It must also cite current provisions of Mississippi law that would need to be amended to make any recommended tax changes.
Initial findings and recommendations must be reported to the Legislature by October 1, 2022.
This shouldn’t come as a surprise. In September 2021, the Mississippi Department of Revenue filed an administrative procedures notice proposing an amendment to the tax treatment of computer equipment, software, and certain related services, to take effect 30 days after filing. (A notice for an oral proceeding was filed a few weeks later.) Although the department stated it was amending the rule to “clarify the tax treatment of computer software sales and services,” the proposed rule would institute some pretty significant tax policy changes.
Taxable sales and services
Computer hardware, software, and services
The following transactions are subject to Mississippi sales and use tax at the regular rate under the proposed rule (unless otherwise exempt):
- Cloud computing
- Computer software
- Computer software license fees (one-time or annual) and/or maintenance contract income (taxable regardless of how billed)
- Creation and design of a webpage (regardless of location of hosting service and certain cloud computing services)
- Gross income received from computer software sales and services
- Infrastructure as a Service (IaaS)
- Platform as a Service (PaaS)
- Software as a Service (SaaS)
- The sale, lease, or rental of computer hardware, parts, supplies, publications, or other tangible personal property
The proposed rule also provides updated definitions for many of the above.
Sales of software or software services transmitted via the internet to destinations outside the state of Mississippi are exempt from Mississippi sales and use tax as long as first use occurs outside the state.
However, Mississippi sales tax does apply to software hosted on servers in other states that’s accessible in Mississippi via the internet only. The proposed amendment removes a provision stating “software maintained on a server located outside the state and accessible for use only via the Internet is not taxable.”
The following professional services are also taxable and included in gross taxable income:
- Charges for installing, configuring, debugging, modifying, testing, or troubleshooting computer hardware, networks, programs, or software
- Charges for the recovery of damaged, deleted, or lost data or other services
- Initial charges for the training of user personnel or telephone support connected with the sale of computer hardware, programs, or software (regardless of when or where the services are provided)
Professional services can be nontaxable or taxable
The taxability of certain professional services varies depending on the circumstances of the transaction. Therefore, the following services are generally nontaxable:
- Accounting and legal services (e.g., advice on tax matters, assets management, budgetary matters, quality control, information security, operational and financial statements, auditing, and any other situation in which the service provider receives data or information and studies, alters, analyzes, interprets, or adjusts such material)
- Analyzing business policies and conceptual design of new procedures
- Feasibility studies including economic and technical analysis of existing or potential computer hardware or software needs and alternatives
- Identifying management information needs
- Word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production, and other computerized data and information storage or manipulation services (including charges for computer time used in providing these services)
However, if any of the above services (or other professional services) are provided incidental to the sale of computer hardware, programs, or software, the entire charge is taxable.
Any person or business, including accountants and financial institutions, can be a retailer of computer programs or software, regardless of their line of business (e.g., accounting firms and banks). In March 2022, the Supreme Court of Ohio determined a bank provided taxable automatic data processing or electronic information services rather than nontaxable services and software, affirming a decision by the Ohio Board of Tax Appeals. Diane Yetter of the Sales Tax Institute notes that services with digital elements are particularly prone to being taxed.
Perhaps that’s why Mississippi’s new Taxation of Remote and Internet-based Computer Software Products and Services Study Committee is to be comprised of the following:
- The Commissioner of the Mississippi Department of Revenue
- The Chief Executive Office of the Mississippi Association of Realtors
- The Executive Director of the Business and Industry Political Education Committee
- The President of the Mississippi Manufacturers Association
- The President of the Mississippi Bankers Association
- (or the designee of any or all of the above)
Each represented industry has a stake in the outcome as all use cloud computing services.
Mississippi needs to clarify taxability of digital goods and services
While the proposed rule clarifies the department’s policy, it also sparks many questions. These include, but aren’t limited to:
- Who would be liable for the tax, particularly when a marketplace is involved?
- Would the changes be enforced retroactively?
- How would the state tax a centralized software license or service used by employees in more than one state?
It will be interesting to see whether the new committee examines these and other questions.
Many states tax digital products. More are likely to expand sales tax to a variety of professional services, including those reliant on cloud computing services. For example, Kentucky recently expanded its sales tax to prewritten computer software access and many other services.
Learn more about issues affecting remote providers of digital products and services in the industry tax section of the Avalara Tax Changes 2022 report.
Update: On May 17, 2022, the Misissippi Department of Revenue withdrew the proposed rule changes that sought to amend the state's sales and use tax treatment of computer equipment, software, and services delivered through the cloud. However, the Taxation of Remote and Internet-based Computer Software and Services Study Committee will continue to develop recommendations for whether and how these products and services should be taxed.
It’s here — Read Avalara Tax Changes 2023
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