The Mississippi Legislature recently enacted SB 2449 (effective July 1, 2023) to address longstanding issues related to how the state taxes remote software and computer services.  What began in 2021 with an effort by the Mississippi Department of Revenue to update and modernize its sales tax regulations (albeit with a significant expansion of the tax base), culminated with comprehensive legislation this year address numerous complexities associated with the delivery and use of computer software in the modern technological era.  The following is a brief summary of some of the key points taxpayers should be aware of as they conform their compliance processes to the new law. 

What is and is not taxable?

• Computer software is tangible personal property and is taxable if it is “physically or electronically delivered or located within this state.”
• Computer software maintained on a server located outside the state and accessible for use only via the internet is not a taxable retail sale. 
  • This codifies the identical rule that has been contained in the Department’s regulations for several decades, so cloud-based and other remote software is not taxable unless it is actually downloaded into the state.
  • This means traditional SaaS and items such as enterprise software maintained on a company’s servers outside the state should remain nontaxable.

• Computer software services are taxable when they are “actually performed within this state.”
• When a taxpayer performs computer software services both within and without the state’s borders,  the taxpayer may utilize “any reasonable formulae” of apportionment to determine that portion of the services which are taxable here.
  • Previously, the law only authorized the Department to make this determination, and no guidance was ever issued.
  • This effectively codifies the historic location-based approach to sourcing computer software services when determining which services are subject to the state’s sales tax.

What is taxable “computer software”?

• Computer software is defined as “any computer program or routine, or any set of one or more programs or routines, which are used or intended to cause one or more computers, pieces of computer-related peripheral equipment, automatic processing equipment, or any combination thereof, to perform a task or set of tasks.”
  • It explicitly does NOT include charges for the use of or right to use physical computer equipment, infrastructure, servers, platforms and other tangible computer devices, including, but not limited to, items commonly referred to as “platform as a service” or “infrastructure as a service.”

What are taxable “computer software services”?

• Computer software service is defined as “technical design and programming of computer software and includes installing, configuring, debugging, modifying, testing, or troubleshooting computer hardware, networks, programs or computer software.”
  • It explicitly does NOT include the following non-exclusive list of services:
    • the use of or right to use physical computer equipment, infrastructure, servers, platforms and other tangible computer devices, including, but not limited to, items commonly referred to as “platform as a service” or “infrastructure as a service”;
    • information and data processing services;
    • services that use a computer, computer equipment, or computer software as a tool to perform or complete that service;
    • internet access services or charges;
    • payment processing or banking services;
    • real estate listing or pricing services;
    • electronic advertising and marketing services; and
    • social media services

What are nontaxable “information and data processing services”?

• This term includes, but is not limited to, automated or nonautomated services where the primary object of the service is the systematic performance of operations by the service provider to enter, store, sort, analyze, aggregate, classify, manipulate, convert, retrieve, extract and/or compile the required information into an appropriate form, usable information, or report.
  • This category of nontaxable services explicitly includes the following non-exclusive list of examples:
    • check or payment processing services;
    • image processing services;
    • form processing services;
    • billing services;
    • transcription services;
    • word processing services;
    • survey processing services;
    • payroll processing services;
    • claim processing services;
    • research database services; and
    • accounting and tax compliance services
  • Because this provision is not an exemption but rather a limitation on the scope of the sales tax, any future ambiguities should be construed in favor of the taxpayer and against taxation.

Direct pay permit

• The new law directs the Department to make available a special certificate, much like a direct pay permit, to allow business consumers to self-accrue taxes on these items and services.
  • This takes the vendor out of the equation, which will be important when unbundling transactions, determining which portion of a transaction occurred inside Mississippi versus elsewhere, what rate applies, etc.
  • It also should give taxpayers a direct right to recover overpaid taxes rather than have to go back through their vendor.
• Taxpayers are not required to use this certificate; it will be optional at the taxpayer’s discretion.
• That form should be available from the Department later in June.

Bundled transactions

• The new law authorizes consumers to “unbundle” payments that represent a combination of taxable and nontaxable items or services.

• Taxpayers may do this “based on a reasonable allocation of the payment to each separately identifiable item or service encompassed by the fee or payment, if properly supported by the books and records of the seller, service provider, user, or consumer.”
  • If the consumer cannot get that information from its vendor, it may make that determination “based on the best information available to the user or consumer if properly supported by the books and records of the user or consumer.”
    • The law explicitly states that no presumption arises that the entire fee or payment is taxable merely because it encompasses both taxable and nontaxable elements.
  • The Department is authorized to review that determination on audit, but if it challenges that method it must establish by a preponderance of the evidence:
    • (1) that the allocation method utilized by the seller, service provider, user, or consumer was not a reasonable method of allocation, and
    • (2) that the allocation method proposed by the commissioner is the most reasonable of all available or alternative methods.

Multistate use

• The new law authorizes taxpayers to determine that portion of a multistate license fee or payment attributable to computer software located within the state or to computer software services which are actually performed within the state.
  • It provides several specific “safe harbor” methods taxpayers can use in making this allocation.
    • If none of the above safe harbor allocation methods fairly reflect the allocation of these items to the state, the taxpayer may make such allocation based on the best information available to such person if properly supported by the books and records of the seller, service provider, user or consumer.
  • The Department is authorized to review that determination on audit, but if it challenges that method it must establish by a preponderance of the evidence:
    • (1) that the allocation method utilized by the seller, service provider, user, or consumer was not a reasonable method of allocation, and
    • (2) that the allocation method proposed by the commissioner is the most reasonable of all available or alternative methods.

Intercompany exemption

• The law contains an important exemption for intercompany services or charges that might include software or related support services.
  • Computer software or computer software services provided by one legal entity to another commonly owned, related or affiliated entity shall be treated as nontaxable transfers between different segments of one (1) legal entity, with proper credit allowed for Mississippi sales or use tax paid and/or credit for sales or use tax paid to another state as provided in this section or in the use tax code, regardless of which affiliated entity paid the sales or use tax for which credit is taken.
    • This is intended to protect centralized internal corporate IT and technical support groups from triggering a sales tax liability.
  • This provision does not exclude from taxation the purchase or payment by such organization to a third party seller or provider for any computer software or computer software services that are otherwise taxable.

Credit for taxes paid to other states

• The law establishes a credit mechanism for sales taxes paid to other states on these items.
  • This is similar to the use tax credit that has always existed, but no comparable credit was contained in the sales tax code.
  • The credit encompasses taxes paid at both the state and local levels in other jurisdictions.

Transition provisions

• These changes are prospective only, and do not impact any assessment, refund, etc. proceedings applicable to periods prior to the July 1, 2023 effective date.

This legislation should be very beneficial to local businesses and should resolve numerous issues that commonly arise in sales and use tax audits, especially in the context of SaaS and other modern remote software and service applications.