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Software as a service subject to Rhode Island sales tax starting October 1, 2018


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The taxability of software as a service (SaaS) is often unclear, despite it being a common business model. But bit by bit, that’s changing. Starting October 1, 2018, SaaS will be subject to sales and use tax in Rhode Island.

House Bill 7200A imposes a tax on the “sale, storage, use or other consumption of vendor-hosted prewritten computer software as defined in § 44-18-7.1 (g)(vii).”  Rhode Island sales and use tax will apply whether access to the software is permanent or temporary (often the case with subscription models), and whether software is downloaded or not. As Michael F. Canole of the Rhode Island Division of Taxation puts it, “If you access or use software available via the internet … it will be taxable.” That applies to prewritten software upgrades, too.

Examples of taxable purchases include, but aren't limited to, the following:

  • Paid subscriptions to software programs that provide digital tools for office work 
  • Programs paid for and accessed or used online to handle customer relationship management (CRM)
  • Online dating services paid for and accessed or used online, including through dating apps on a computer, phone, or other device

The Rhode Island Division of Taxation provides some examples to help clarify how the new policy differs from the old policy. It calls it, “Old law, new law”:

  • Tax-preparation (or other) software purchased off the shelf at a local store (e.g., on a compact disc) was and will remain taxable.
  • Tax-preparation (or other) software purchased and downloaded from a website was and will remain taxable.
  • Starting October 1, “if you go online and pay to use a tax program to prepare your tax return online — ‘in the cloud’ (cloud computing) — the transaction will be subject to the tax.”

Note that the last example doesn’t say if the cloud computing option was subject to tax under the old law. That’s because no law addressed the taxability of cloud computing prior to the enactment of the budget bill for fiscal year 2019.

However, prewritten computer software delivered electronically or by load and leave (when software is installed directly onto the customer’s computer using tangible storage media that’s not transferred to the customer as part of the sale) has been subject to Rhode Island sales and use tax since October 1, 2011. Custom software remains exempt in the Ocean State whether downloaded or delivered in tangible form. The customization of prewritten computer software is also exempt.

According to the Division of Taxation, retailers of SaaS not already registered to collect Rhode Island sales and use tax must register and obtain a sales tax permit by October 1, and start collecting and remitting sales and use tax on their Rhode Island sales on October 1. Should a retailer fail to collect tax on a sale of SaaS, the consumer must remit the corresponding use tax directly to the state.

Out-of-state vendors unclear whether they're liable for the tax should see Division of Taxation Advisory 2018-24 for more information. Participating in a nexus study can also help identify where sales tax nexus (a tax collection obligation) has been established. The team of tax professionals at Avalara can help.

Determining the taxability of software in different states is a big job. Learn more about it here


Avalara Author
Gail Cole
Avalara Author Gail Cole
Gail Cole began researching and writing about sales tax for Avalara in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.