The North Carolina Department of Revenue issued a private letter ruling to address the taxability of a taxpayer’s free application offered to customers that is part of its web-based services provided via a software as a service (SaaS) model.
The SaaS model allows a customer to access a vendor’s software application that is running on a cloud-based infrastructure. The software application only exists on the vendor’s server and is only accessible over the Internet. Customers generally cannot install, download, or transfer the application software to their own computers.
The taxpayer provides an application to its customers free of charge. Customers have the option of downloading the application to a personal device, but the application requires that a majority of the data and information entered into the application be entered while connected to the Internet. Customers’ pricing for services provided by the taxpayer did not change after the free application was made available.
The North Carolina Department of Revenue determined in the letter ruling that the application provided free of charge does not constitute a sale or a part of the charges for Taxpayer’s web-based services. Furthermore, the state does not currently impose sales and use tax on revenue from access to cloud-based software accessed electronically via an Internet connection. (SUPLR 2021-0005 Remote Access to Computer Software, North Carolina Department of Revenue, March 3, 2021)