In October 2024, the Pennsylvania Department of Revenue (DOR) released informal guidance on the taxability of software-related services. The long-awaited guidance confirms the DOR’s stance on what qualifies as taxable services associated with software and software as a service (SaaS).
Background
In August 2016, then-Gov. Tom Wolf signed Act 84 into law, codifying Pennsylvania’s longstanding position — supported by case law (see, e.g., Graham Packaging Co. LP v. Pennsylvania and Dechert LLP v. Pennsylvania) — that regardless of the method of delivery, software is subject to tax. The law also expanded the tax base to include digital goods and software support.
Before the changes, taxpayers relied on a regulation dating back to 2000 to interpret which software-related services were subject to tax (e.g., updates, upgrades, and maintenance) and which were not (e.g., separately stated consultation, support, and training services).
No new or updated regulations were issued to reflect the statutory changes, leaving inconsistencies between Pennsylvania’s laws (72 P.S. § 7201(m)(2)) and regulations (61 Pa. Code § 60.19) and questions regarding the definition of the word “support.” If a statute and regulation differ, the statute takes precedence.
New Guidance
The informal guidance describes taxable software support as “the providing of advice or guidance concerning otherwise taxable digital or electronic tangible personal property involving identifying the source of problems affecting the usability of the property and attempting to place the property in or restore the property to a useable state.” It provides examples of other taxable services related to software and digital goods, including:
- Configuration — Enabling specific functions within canned software;
- Consulting — Gathering information, analyzing, and documenting a customer’s needs for software solutions if sold in conjunction with the sale of tangible personal property or other taxable services, even if invoiced separately;
- Enhancement — Improving or altering software to increase performance or capacity or to add functionality/capability;
- Installation — Loading software via download or from a disk, regardless of whether the party installing is the vendor of the application or a separate vendor;
- Modification — Custom programming of canned software;
- Information Retrieval — Obtaining products electronically, which may include a search function;
- Website Development — Creating, building, and maintaining websites and web applications; and
- Data Sales — Providing access to data or databases.
BDO Insights
- The informal DOR guidance is not binding because it was not issued via law or as formal guidance. Further, it is not defined within — and, in some cases, directly conflicts with — the current statute and regulations.
- The guidance affirms the nontaxable nature of custom software and separately stated charges for help desk or call center support if the vendor does not access the software.
- The informal guidance provides example scenarios, but taxpayers still need to evaluate the economic realities of each transaction to determine taxability.
- Taxpayers should consult with tax specialists to determine the appropriate sourcing of software and software-related service transactions to ensure the appropriate amount of tax is remitted.
- If vendors charge tax on nontaxable services or tax is incorrectly sourced to Pennsylvania, taxpayers might be able to recoup those amounts.
Please visit BDO’s State & Local Tax Services page for more information on how BDO can help.