The Mississippi House of Representatives yesterday amended S.B. 2449 to adopt comprehensive provisions regarding the sales and use taxation of remote software and related services.
This amendment codifies the Department of Revenue’s existing regulation that “computer software maintained on a server located outside the state and accessible for use only via the Internet is not a taxable retail sale.” In essence, it would confirm that Mississippi only taxes software that is physically downloaded or delivered into the state, and excludes remote cloud-based applications. It takes a similar approach in taxing only those computer software services actually performed within the state, so computer support activities performed remotely would not fall within the scope of the tax.
The bill is expected to go back to the Senate for concurrence and, if approved, could go to the Governor for signature shortly thereafter.
A Long and Winding Path . . .
This legislation is the culmination of well over a year of debate and study of the remote software taxation issue. Readers may recall prior coverage of the Department’s attempt to capture remote software such as SaaS in late 2021 via a proposed sales tax regulatory amendment. That effort would have deleted from the Department’s current regulations the longstanding provision acknowledging that the tax does not apply to “software maintained on a server located outside the state and accessible for use only via the Internet.” The Mississippi business community vocally opposed this proposal, viewing that attempted amendment as a broad and illegal sales tax increase without legislative approval. Following that backlash, the Department withdrew the proposed regulation but continued to instruct vendors to collect sales tax on these products and services – arguably in direct contravention of existing law.
H.B. 968, a companion bill originally introduced in the House, would have implemented a legislative study committee’s recent recommendation to adopt a broad exclusion for all software and related services used as business inputs. That study committee, established by the 2022 Legislature, conducted multiple public hearings throughout last year and issued its comprehensive final report to the Legislature on October 1. The study committee’s recommendations to exclude these business inputs from sales and use tax reflected the significant compliance complexity associated with constantly changing technology, long-term economic development considerations, and a desire to thwart the rapid expansion of the state’s sales and use tax into ordinary business overhead and administrative expenses.
Following the introduction of the original House bill, a substitute version was adopted in committee that explicitly would have expanded the sales tax to encompass these remotely accessed goods and services, basically adopting the Department’s original position. This amendment caused widespread alarm throughout the business community because it would have represented a significant tax increase on their operations, created a material disincentive to locate, expand or even continue to maintain technology-intensive business activities in the state, and was a major departure from historic Mississippi tax policy related to remotely accessed computer software products and services.
Following extensive negotiations with Senate and House leadership, leading business groups such as BIPEC, the Mississippi Manufacturers Association, the Mississippi Economic Council, the Mississippi Bankers Association, the Mississippi Realtors Association, and the Department were able to draft and agree on a new “compromise” version that would preserve the state’s historic approach to taxing these items based on physical location while also addressing a number of important ancillary and compliance issues. That compromise proposal is now reflected in the amended S.B. 2449 which now appears to be the vehicle for moving the legislation forward.
Summary of Bill Contents
The bill contains many important changes and features, including the following:
- Inserts language clarifying that taxable retail sales of tangible personal property include only those items that are “physically or electronically delivered or located within this State.” The bill also codifies in both the sales and use tax codes the Department’s existing regulation that “computer software maintained on a server located outside the state and accessible for use only via the Internet is not a taxable retail sale.”
- Clarifies that Mississippi only taxes “computer software services actually performed within this state” as distinguished from those performed remotely from locations outside the state.
- Adopts formal definitions of computer software, computer software services, and information and data processing services, with multiple illustrative examples. Information and data processing services are expressly excluded from taxation.
- Direct accrual and reporting by end users – The bill requires the Department to offer software users the equivalent of a direct pay permit that they can provide to their vendors and services providers, relieving those third parties of their obligation to collect sales or use tax. Instead, the user will self-accrue and report the appropriate taxes based on their use of taxable items and services within the state.
- Each user can elect whether to utilize this process or follow the traditional methods of paying taxes to their vendors. This process already exists for manufacturers and certain other industries, and should be easily implemented.
- This removes the vendor or provider from the collection process, which should significantly streamline compliance and allow for the direct recovery of any overpayments by the end user.
- Exclusion for PaaS and Iaas – Clarifies that computer software does not include charges for the use of or right to use physical computer equipment, infrastructure, servers, platforms and other tangible computer devices, including but not limited to items commonly referred to as “platform as a service” or “infrastructure as a service.” Thus, remote cloud-based services such as PaaS and IaaS would not be taxable as long as the underlying equipment resides outside Mississippi.
- Bundled transactions – Authorizes taxpayers to “unbundle” transactions comprised of both taxable and nontaxable computer software or services. Importantly, the new law would expressly bar any presumption that the entire fee or payment is taxable because it encompasses both taxable and nontaxable elements.
- Multistate allocations – The new version authorizes taxpayers to determine that portion of a multistate license fee or payment attributable to computer software located within the state, or to computer software services which are actually performed within the State of Mississippi. The law provides several “safe harbor” methods taxpayers can use in making this allocation.
- While the Department is authorized to audit a taxpayer’s method of unbundling or allocating multistate software or service usage, the bill includes language protecting against arbitrary audit positions. As long as the taxpayer’s method was supported by its books and records, the Department will have to establish by a preponderance of the evidence (a) that the allocation method utilized by the seller, service provider, user, or consumer was not a reasonable method of allocation and (b) that the allocation method proposed by the commissioner is the most reasonable of all available or alternative methods. This language should be similar to the income tax alternative apportionment provisions adopted nearly a decade ago.
- Intercompany exemption – The amendment enacts a rule that computer software and computer software services provided by one legal entity to another commonly owned, related, or affiliated entity shall be treated as nontaxable transfers between different segments of one legal entity. This is intended to protect internal corporate IT and technical support groups from triggering a sales tax liability. The language states clearly that it does not exempt the purchase of those items from third parties, as those external transactions would remain taxable based on the above rules.
- Credit for taxes paid to other states – The bill provides a sales tax credit mechanism for taxes paid on these items to other states. The use tax code already includes this provision, but it was necessary to incorporate similar rules in the sales tax statutes to prevent double taxation across multiple states.
- Transition provisions / effective date – The bill would be effective July 1, 2023, in order to allow the Department to update its direct pay permit process and for taxpayers to update their compliance platforms. These changes are prospective only, and do not impact any assessment, refund, etc. proceedings applicable to periods prior to the effective date.
While the bill appears to have momentum for ultimate passage, Jones Walker LLP will continue to monitor and report on any developments.
Update – March 23, 2023
SB 2449 – Mississippi’s remote software sales tax bill – was sent to the Governor today (Mar. 23) for his signature. The final version of SB 2449 can be found here.
Update – March 29, 2023
SB 2449 was officially signed into law on March 28, 2023, and will become effective July 1, 2023.