Does Kansas sales tax apply to charges for hosted software, SaaS, or application service provider (ASP) services?

Plain-English summary

A software company that bills Kansas physicians for a "hosted software product" — software that lives on out-of-state servers and is accessed over the Internet, with nothing downloaded and title and possession never passing to the customer — asked whether Kansas sales tax applies, and for the statutory authority.

The Department's answer: hosted software (also called SaaS or an ASP service) is not subject to Kansas sales tax. Kansas sales tax reaches only the services enumerated in K.S.A. 79-3603 (and "service" is defined by reference to that list in K.S.A. 79-3602(nn)). None of those enumerated services covers hosted software, SaaS, or ASP services, so the tax is never imposed in the first place. The Department was careful to say the charges are not "exempt" — since tax was never imposed, there is nothing to exempt.

The charges are also not taxable as "prewritten computer software" under K.S.A. 79-3603(s), because the software sits on the provider's remote server and is not delivered to or installed on the subscriber's computer; the provider keeps title and possession. Any small piece of access software the provider sends to let the subscriber reach the remote application is part of the nontaxable service, so long as it is not billed as a separate line-item charge. (The Department's guide EDU-71R states the same position.)

What this means for you

SaaS, cloud, and hosted-software vendors

If your customers only get remote Internet access to software running on your servers — with no download and no possession of the software — your subscription charges are not subject to Kansas sales tax. Don't separately bill an "access software" line item, or that piece could be treated as a taxable software sale.

Kansas businesses buying SaaS

Charges for genuine hosted software / SaaS are not Kansas-taxable. Watch for bundled products that include downloaded prewritten software or separately stated taxable items, which can be taxed on their own.

Tax professionals

The analysis is imposition-based: only services enumerated in K.S.A. 79-3603 are taxed, and hosted software is not among them; remote-server software is not "prewritten computer software" delivered under 79-3603(s). See EDU-71R. Separately stated software delivered to the subscriber can change the result.

Common questions

Q: Is SaaS taxable in Kansas?
A: No. Charges for hosted software / SaaS / ASP services are not subject to Kansas sales tax.

Q: Why isn't it taxed as software?
A: The software stays on the provider's remote server and is not delivered to or possessed by the subscriber, so it is not a taxable sale of "prewritten computer software."

Q: Can separately billing "access software" create tax?
A: Yes. Access software delivered to the subscriber is part of the nontaxable service only if it is not billed as a separate line-item charge.

Q: Does this opinion bind the Department?
A: An Opinion Letter is general guidance without the force of law; another taxpayer with different facts should not assume the same result.

Citations and references

• K.S.A. 2010 Supp. 79-3603 — imposition of sales tax; the enumerated taxable services
• K.S.A. 2010 Supp. 79-3602(nn) — definition of "service" (by reference to 79-3603)
• K.S.A. 79-3603(s) — tax on sales of "prewritten computer software"
• Kansas Information Guide EDU-71R, Revised Sales Tax Guidelines: Taxing Charges for Computer Products and Services and Internet Related Sales and Services (July 23, 2010)

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-2012-001

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

February 6, 2012

XXXX
XXXX
XXXX

RE: Your letter dated January 4, 2012

Dear XXXX:

Thank you for your recent letter. You ask how Kansas sales tax applies to charges for "hosted software product" billed to Kansas physicians. You explain:

The software is located on servers outside [Kansas] and accessed by its customers via the Internet. There is no software downloaded or delivered to the customer; title and possession of the software never passes to the customer. Training services are provided to the customer either by the client's personnel on site at the customer's [Kansas] location or via web-based programming. Training is optional to the customer and there is a separate charge to the customer for training services.

One on-line definition of "hosted software" provides:

Hosted software is software that is installed, hosted and accessed entirely from a remote server or location. Hosted software is hosted and managed by the software manufacturer or a third-party vendor. Users can access it globally through the Internet. Hosted software is also known as software as a service (SaaS), a cloud computing service model. www.techopedia.come/definitions/26635/hosted-software

Terms that are related to "hosted software" include "software as a service" (SaaS) and "application service provider." (ASP). For most practical purposes, these terms refer to the same contractual transaction, which obligates a service subscriber to pay a fee to gain Internet access to, and the use of, the service provider's software and servers and to the data the subscriber inputs and stores on those servers. The same question usually is being posed whether KDOR is asked how sales tax applies to charges for SaaS software or hosted software or to an ASP's charges to subscribers for its service.

KDOR has published the answer to this question in Information Guide EDU-71R, Revised Sales Tax Guidelines: Taxing Charges for Computer Products and Services and Internet Related Sales and Services, (July 23, 2010):

(e) Charges for using software on a remote computer. A lease does not include obtaining remote access to someone else's computer software and equipment via the Internet or other electronic means when the customer does not have control over or have possessory rights to the software or equipment. This includes charges billed by an application service provider. (ASP). Section IV(e).

(i) Remote servers located in Kansas. When an in-state or out-of-state business leases or leases space on a remote server located in Kansas and buys prewritten software that is installed in the server, the software purchase is subject to Kansas sales or use tax. The charge to the in-state or out-of-state business for leasing or leasing space on the Kansas server is also subject to Kansas tax. Charges by an ASP for its services are not subject to sales tax. Section IV(i)

You ask KDOR to provide you with the "applicable statutory authority" that supports the position KDOR has taken for "hosted software." That authority is found in K.S.A. 2010 Supp. 79-3603, which imposes retailers' sales tax on charges for "rendering or furnishing any of the services taxable under this act," and K.S.A. 2010 Supp. 79-3602(nn), which provides "'[s]ervice' means those services described in and taxed under the provisions of K.S.A. 79-3603 and the amendments thereto."

None of the taxable services enumerated in K.S.A. 79-3603 can be construed as hosted software services, services provided by an ASP, or SaaS services. Accordingly, there is nothing in the sales tax imposition statutes that supports taxing charges for hosted software. Technically, the charges for hosted service aren't "exempted" or "excepted" from sales tax because tax isn't imposed on the service charges in the first place. Since tax has never been imposed on the services, tax payment and collection duties never exist. Since tax payment and collection duties never exist, there is nothing to carve out a tax exemption from or to draft an exemption for.

Charges for hosted software services are not taxable as sales of "prewritten computer software" under K.S.A. 79-3603(s) because the software that is installed on a remote server isn't delivered to subscribers or installed on their computers. The service provider has title and possession of the software. The department has ruled that any software that is delivered to a service subscriber that allows the subscriber access to the provider's remote application software is part of the non-taxable service. Such software is not taxable as a sale of prewritten software so long as the software is not billed to subscriber as a separate line item charge.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 02/07/2012 Date Modified: 02/07/2012

Table 1

| Letter Number: | O-2012-001 |

Table 2

| Tax Type: | Kansas Retailers' Sales Tax |
| Brief Description: | Sales tax applicability to charges for "hosted software product" billed to Kansas physicians. |
| Keywords: | |
| Approval Date: | 02/06/2012 |