April 11, 2023 Mississippi law brings clarity to the application of state sales and use tax to computer software, exempts software maintained on an out-of-state server
On March 28, 2023, Mississippi Governor Tate Reeves signed into law SB 2449, which clearly applies sales and use tax to computer software and computer software services. Computer software maintained on a server located outside Mississippi and accessible for use only via the internet, however, is exempt from sales and use tax. The changes made by SB 2449 take effect July 1, 2023. New statutory provisions define key terms, allow allocation and apportionment of fees and payments A newly added section1 to Miss. Code Tit. 27, Ch. 65 defines "computer software," "computer software service" and "information and data processing services," which apply for purposes of Ch 65. The new section also provides for the allocation of fees and payments for computer software or computer software services that encompass both taxable and nontaxable services or the apportionment of fees and payments that includes taxable computer software or computer software services both within and outside Mississippi. "Computer software" does not include charges for the use or right to use physical computer equipment, infrastructure, servers, platforms and other tangible computer devices, including "platform as a service" (PaaS) or "infrastructure as a service" (IaaS). The term "computer software services" does not include:
This is a nonexclusive list. The term "information and data processing services" includes the following services:
If a single license fee or other payment includes taxable computer software or computer software services and nontaxable items or services, the seller, service provider, user or consumer can allocate the fee or payment between taxable and nontaxable items or services. Such allocation is based on the books and records the seller, service provider, user or consumer; if, however, such information is not available from a seller or service provider or otherwise obtainable, the user or consumer may make the allocation based on the best information available to the user or consumer as supported by the user's or consumer's books and records. Similarly, if a single license fee or other payment includes taxable computer software or computer software services both within and outside this state, the seller, service provider, user or consumer can apportion to Mississippi the portion of the fee or payment attributable to computer software located within the state or computer software services that are actually performed in Mississippi. The allocation may be made using an applicable safe harbor method for computer software physically loaded, stored or maintained both within and outside Mississippi2 and computer software services actually performed within and outside Mississippi.3 If none of the safe harbor methods fairly reflect the allocation of the taxable computer software or computer software services in Mississippi, the seller, service provider, user or consumer may allocate the fee or payment based on the best information available that is properly supported by its books and records. The tax commissioner can challenge the allocation or apportionment method by showing the method used by the seller, service provider, user or consumer was not a reasonable method of allocation or apportionment, and that the commissioner's proposed allocation or apportionment method is "the most reasonable of all available or alternative methods." The law also treats transfers of computer software or computer software services provided by one legal entity to other commonly owned, related or affiliated entities as nontaxable transfers between different segments of one entity. A credit is allowed for sales and use tax paid to Mississippi or to another state, regardless of which entity paid the tax. The law makes clear that these provisions do not exclude from taxation the purchase or payment by such organization to a third-party seller or provider for otherwise taxable computer software or computer software services. Clarifications and changes to existing law Most notably, provisions of SB 2449 make clear that computer software maintained on a server located outside Mississippi and accessible for use only via the internet is neither a taxable retail sale under Miss. Code Section 27-65-7, nor is it a taxable use, storage or consumption under Miss. Code Section 27-67-5. The definition of "tangible personal property" under Miss. Code Section 27-65-3(j) is expanded to include computer software, but specifically excludes electronically stored or maintained data. Changes to the definition of "retail sales" under Miss. Code Section 27-65-7 clarify that "all sales of tangible personal property" includes sales that are physically or electronically delivered or located within Mississippi. In addition, Miss. Code Section 27-65-19 is amended by deleting subsection (1)(d)(i)(5), which taxed gross income from all charges for products delivered electronically, including software, music, games, reading materials or ring tones. In its place, SB 2449 adds more specific language, taxing, as provided in other sections of this chapter, sales of computer software, computer software services, specified digital products or other products delivered electronically, including music, games, reading materials or ring tones. The description of "digital products delivered electronically" under the list of items that are not "telecommunications services"4 has been modified to change "software" to "computer software" and expanded to include computer software services, electronically stored or maintained data, and specified digital products (this is in addition to music, video, reading materials and ring tones). Miss. Code Section 27-65-23's list of businesses or activities excepted from tax is changed from "computer software sales and services" to "computer software services actually performed within this state." Miss. Code Section 27-65-23 is further amended to allow a taxpayer that performs services in both in intrastate and interstate commerce to use any reasonable apportionment formula that will apportion the portion of the services performed in Mississippi. Lastly, SB 2449 directs the commissioner to adopt rules and regulations on issuing permits allowing purchasers and users of computer software or computer software services to report and pay sales tax directly to the commissioner instead of the vendor. This provision relieves a vendor from having to collect and remit sales and use tax, while making clear that the person holding the permit is liable for those taxes instead of the seller. Implications While these changes represent an attempt to clearly address ambiguities that have plagued taxpayers licensing SaaS and providing other computer- and software-related services to customers in Mississippi, the prospective-only effective date of the legislation does not appear to provide a clear path toward resolving historical audit or financial reporting risk. Accordingly, taxpayers will need to evaluate their risk profiles for historical periods as the complex statutory structure in place currently and historically can drive different results based upon the nexus position of the vendor, and in-turn, which chapter of Mississippi law applies to each taxpayer (i.e., sales/privilege tax which is governed by Chapter 65 or use tax which is governed by Chapter 67 and only applies to sales of tangible personal property and digital goods and does not apply to services). ———————————————
Published by NTD’s Tax Technical Knowledge Services group; Maureen Sanelli, legal editor ——————————————— ENDNOTES 1 See Section 6 of SB 2449. 2 The safe harbors for computer software physically loaded, stored or maintained both within and outside Mississippi are based on the specific identification of the locations where the software is loaded, stored or maintained, or a ratio calculated by reference to the number of: (1) computers or devices within and outside Mississippi on which the software is loaded, stored or maintained, (2) persons who actually use the computer software within and outside Mississippi, or (3) persons licensed to use the computer software within and outside Mississippi. 3 The safe harbors for computer software services actually performed within and outside Mississippi are based on: (1) the time spend by each person performing the services while physically within Mississippi, or (2) a ratio calculated by reference to the actual time spent within and outside Mississippi by all persons performing the services. 4 See Miss. Code Section 27-65-19(1)(d)(iv) for a list of items that are not "telecommunications services". | ||||||||
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