Software Subscription Services Subject to Tax in South Carolina

The South Carolina Department of Revenue (DOR) has issued a private letter ruling regarding the application of sales and use tax to a cloud-based software subscription service. The taxpayer is a cloud-based business management software provider that caters to durable medical equipment suppliers. The cloud-based software simplifies the billing and claim submission process for customers. The software is billed as a lump-sum monthly subscription fee. No transfer of software or tangible personal property occurs. The taxpayer provides its customers access and use of the online software but does not manipulate customer data. Customers enter and manipulate their own data, generate claims submissions, and generate reports in the software.

South Carolina tax law provides that sales of communications are subject to sales tax, and a South Carolina regulation provides that database access transmission services or on-line information services are taxable communications, including Application Service Providers (ASP). Here, the Department held the taxpayer’s charges for their software subscriptions were for access and use of software via an ASP and are therefore subject to South Carolina sales and use tax. Note this ruling is consistent with prior South Carolina Revenue Rulings that an ASP provides customers access or use of software on the seller’s website and so are taxable as communications. (SC PRIVATE LETTER RULING #20-1)

Posted on February 27, 2020