The Indiana Department of Revenue (“Department”) recently issued a revenue ruling to address concerns from a California-based business regarding the applicability of sales and use tax to cloud-based text messaging services (Revenue Ruling No. 2015-08ST, Indiana Department of Revenue, March 7, 2017). Utilizing cloud technology operated remotely and maintained outside of Indiana, the company offers a software service that does not require software downloads or installation of software utilized at hotels. The software routes messages between hotel employees and hotel guests through this service. For instance, after a hotel guest’s phone number has been registered with the company, and the guest has received a welcome message on the guest’s phone, the guest may request extra towels by submitting a request via a text message to the hotel. The software would then route the request to the hotel and may generate an automatic or custom response back to the guest.
The Department concluded that the serviceperson test outlined in 45 IAC 2.2-4-2 applied to the messaging service based on the facts and circumstances presented. The company was deemed to have met the serviceperson test because it is primarily in the business of mobile messaging as opposed to selling tangible personal property; the software is used by the company for the purpose of sending text message alerts between clients (hotels) and client customers (hotel guests), and customers are charged for mobile messaging services as opposed to the software itself.
The company retains ownership of the software, and its customers are not granted any rights to or control of the software. The software is used by the company incident to the mobile messaging service provided. As such, the product was deemed to be a service per 45 IAC 2.2-4-2 instead of a taxable sale, lease, license, or other transfer of software or other tangible personal property.
However, the Department also explained that the product meets the definition of a telecommunication service. Pursuant to IC 6-2.5-1-27.5, a “telecommunication service” is defined as follows:
(a) “Telecommunication services” means electronic transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals to a point, or between or among points.
(b) The term includes a transmission, conveyance, or routing in which computer processing applications are used to act on the form, code, or protocol of the content for purposes of transmission, conveyance, or routing regardless of whether the service:
(1) is referred to as voice over Internet protocol service; or
(2) is classified by the Federal Communications Commission as enhanced or value added.
Pursuant to IC 6-2.5-1-27.5(c),term does not include the following:
(1) Data processing and information services that allow data to be generated, acquired, or retrieved and delivered by an electronic transmission to a purchaser whose primary purpose for the underlying transaction is the processed data or information.
(8) Ancillary services.
“Ancillary Services” is defined in IC 6-2.5-1-11.3 as follows:
“Ancillary services” means services that are associated with or incidental to the provision of telecommunication services, including the following:
(1) Detailed telecommunications billing
(2) Directory assistance
(3) Vertical services
(4) Voice mail services
Although the company’s use of the cloud-based software does not result in a taxable transaction, the text messaging service is subject to tax as an intrastate telecommunications service pursuant to IC 6-2.5-4-6. Data processing and ancillary services clearly do not fall within the definition of a telecommunication service per IC 6-2.5-1-27.5(c). However, the Department determined that the text messaging services do not qualify as data processing. These services also do not meet the definition of ancillary services because the messaging services are not one of the specific services listed in IC 6-2.5-1-11.3.
Lastly, the Department explained that “telecommunications services,” as defined by IC 6-2.3-1-13,is a “utility service” according to the definition established by IC 6-2.3-1-13.Therefore, the gross receipts received for the company’s cloud-based text messaging service is also subject to the Utility Receipts Tax imposed pursuant to IC 6-2.3-2-1.
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