United States

Utah: Purchase of Online Banking Tools Was Taxable Use of Software

Jan 18, 2016
From KPMG TaxWatch

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The Utah Tax Commission recently issued a private letter ruling holding that a company providing online banking tools to financial institutions for use by customers of the financial institutions was required to collect tax on sales to Utah customers. Using the taxpayer’s proprietary software platform, the taxpayer’s financial institutions customers were able to provide account holders access to online banking tools, including personal account information, an online finance and budget tool, online bill payment, and mobile banking. The taxpayer did not have any contact with its customers’ account holders; all questions on the software and the online tools were directed to personnel of the financial institutions. Except for fees charged customers for downloaded mobile banking applications, the taxpayer did not separately charge its customers for any software or use of the taxpayer’s proprietary platform.

Under Utah law, prewritten software is considered tangible personal property and the sale of, including the right to use, prewritten software is subject to tax. The taxpayer, relying on a prior private letter ruling, argued that its offerings constituted nontaxable data processing and information services because the taxpayer did not license, sell, or transfer the software or platform to account holders or the financial institutions and did not charge for use of the platform. Thus, in the taxpayer’s view, the essence of the transaction was not the sale of tangible personal property, but the provision of non-taxable services.  

The Commission disagreed, concluding that under the essence of the transaction test, the essence of the transaction between the taxpayer and the financial institutions was the sale of the use of the taxpayer’s prewritten computer software to enable the institutions to offer online services to their customers and not the sale of the services by the taxpayer. Use of the software by the financial institutions prompted the taxpayer to provide services related to the website and the other training and support. However, in the Commission’s view, this was not the essence of the transaction. Thus, the taxpayer’s offerings constituted a taxable sale of the right to use its software that was taxable if its customers were located in Utah. For more information on Utah Private Letter Ruling 15-005 (Nov. 16, 2015), please contact Chris Hoge at (801) 237-1350.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.