United States

Arizona: Use of Software to Provide Services Did Not Constitute the Rental of Tangible Personal Property

Mar 27, 2017
From KPMG TaxWatch

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The Arizona Department of Revenue recently issued a taxpayer information ruling addressing whether a taxpayer’s use of software to provide certain services subjected its receipts to tax under the Transaction Privilege Tax rental classification. The taxpayer provided payment processing services to its clients that involved the use of cloud-based software. Clients uploaded information to the taxpayer’s web-based portal via software and accessed data on their processed transactions via the portal. Under Arizona law, the portal and the software are considered tangible personal property. Thus, the specific issue was whether the taxpayer’s use of the software in providing services to customers was considered the rental of tangible personal property to those customers. In earlier Arizona cases addressing whether a taxpayer was renting tangible personal property to customers or providing a service, the key question was whether customers gained sufficient exclusive control and use of the software to constitute the rental of tangible personal property. In the fact pattern at hand, both the taxpayer and its customers used the software. Thus, the Department determined that there did not appear to be the type of exclusive control required under the earlier cases to constitute the rental of tangible personal property (software). Additionally, the payments at issue were not fixed or based on the use of the software; instead, they were based on the specific dollar amount of successful payments processed, suggesting further that the transaction was not merely a rental of the software. Please contact Brian Phillips at 858-750-7295 with questions on Taxpayer Information Ruling LR16-011.


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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.