Are data-conversion services and data-conversion software subject to Kansas sales tax?

Plain-English summary

A company that sells software applications planned to add data-conversion services (moving a customer's data from one format to another, sometimes called "data migration") and asked whether those services and the software behind them are subject to Kansas sales tax. The answer turns on who actually runs the conversion software and whether the customer receives the software itself.

The core rule: selling the use of canned (prewritten) software — by lease, license to use, or rental — is taxable in Kansas no matter how the software is delivered (K.S.A. 2009 Supp. 79-3602(kk)). So canned data-conversion software is taxable when the customer gets title to it or the right to use it. Charges to modify or enhance canned software are exempt if they're separately stated and the changes are developed specifically for that customer.

Applying that, the Department drew three lines:

1. You run it (service) → not taxable. If your business loads the conversion software, monitors it, and takes the steps to make the conversion succeed, the charge for that service is not subject to sales tax — whether you do it in person or from a remote location.
2. Customer runs it (software rental) → taxable. If you deliver the conversion software to the customer (on a disc, by "load and leave," electronically, or otherwise) and the customer is responsible for running it, the charge is taxable as a rental of software.
3. Selling the software → taxable. Charges for canned data-conversion software are taxable if the customer acquires title to it or the right to use it.

Because the company sells prewritten software and would provide conversion to let the customer use that new software, the Department also confirmed that many services sold in connection with prewritten software are taxable — requirements analysis and feasibility studies, system design and development, establishing hardware/software compatibility, loading the software, and configuring or setting it up (short of changing the source code, which is nontaxable customization), plus installing upgrades. These are taxable whether separately stated or lumped with other charges. But actually running a separate data-conversion program is not part of those taxable setup charges, as long as the data-conversion charge is separately stated and the customer doesn't acquire the conversion software.

What this means for you

Software vendors and IT service providers

The taxable/nontaxable line is about control of the software. A conversion you perform as a service — you load and run it, you ensure success — is nontaxable. Hand the software to the customer to run, and it becomes a taxable software rental. Selling the canned software outright is taxable. Keep data-conversion charges separately stated if you want them treated as a nontaxable service rather than folded into taxable software-setup charges.

Customers buying software with conversion help

If the vendor runs the conversion for you, that service shouldn't carry sales tax; if you receive and run the conversion tool yourself, expect tax.

Common questions

Q: Is data-conversion software taxable in Kansas?
A: Yes, canned (prewritten) data-conversion software is taxable when you acquire title to it or the right to use it — the same rule as any canned software under K.S.A. 2009 Supp. 79-3602(kk).

Q: Is a data-conversion service taxable?
A: Not if your provider loads and runs the software and ensures the conversion succeeds — that service is nontaxable whether done on-site or remotely.

Q: What flips it to taxable?
A: If the provider delivers the conversion software to you and you run it yourself, it's taxed as a software rental.

Q: Are software setup and configuration charges taxable?
A: Yes — loading, configuring, and setting up prewritten software are taxable (whether separate or lumped), but true customization that changes the source code is not, and a separately-stated charge to run a data-conversion program is not.

Citations and references

• K.S.A. 2009 Supp. 79-3602(kk) — makes the sale of the use of canned software (by lease, license to use, or rental) taxable regardless of how title, possession, or the right to use is transferred; the basis for taxing canned data-conversion software.
• EDU-71R, Revised Sales Tax Guidelines: Taxing Charges for Computer Products and Services and Internet Related Sales and Services — the Department guideline the ruling relies on for the taxability of software-related services and the exemption for separately-stated custom modifications.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2010-005

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

August 19, 2010

XXXX
XXXX
XXXX

RE: Your e-mail received on January 19, 2010

Dear XXXXs:

Thank you for your recent e-mail. Your company sells different software application programs. It intends to offer data conversion services to its software customers. You ask these services are subject to Kansas retailers' sales tax.

Software conversion is the conversion of computer data from one format into another. It is also called "data migration" when "migration" is used in the sense of moving data between different formats. Data-conversion software is widely available on the Internet. It appears that there are many data-conversion software applications that, after being loaded into a computer, run automatically with no or very limited human intervention. Businesses that develop these applications sometimes offer to modify an application to meet a particular customer's data conversion needs.

In Kansas, the sale of the use of canned software by way of a lease, license to use, or rental is subject to sales tax regardless of how title, possession, or the right to use the canned is transferred to the customer. K.S.A. 2009 Supp. 79-3602(kk). The sale or use of canned data-conversion software is taxable. Charges for modifying or enhancing canned data-conversion software are exempt if the charges are separately stated on the customer's invoice and the modifications or enhancements are developed and designed for that specific customer. See EDU-71R, Revised Sales Tax Guidelines: Taxing Charges for Computer Products and Services and Internet Related Sales and Services

Your company will provide the data-conversion service as an adjunct to its sale and installation of other software programs. Its customer charges for the separately-stated data-conversion services and any sale or use of data-conversion software are taxed as follows:

1. If your business is responsible for loading data-conversion software into a customer's computer, monitoring the software's operations, and taking steps to assure successful conversion of the data, the customer charges for the service and software are not subject to Kansas sales tax. These services are not subject to sales tax whether performed in person or from a remote location.
2. If your business delivers data-conversion software to a customer on a disc, by load and leave, electronically, or by another means and the customer is responsible for monitoring the software's operation and taking steps to assure successful data conversion, the customer charges are subject to Kansas sales tax as rental charges.
3. Charges to a customer for canned data conversion software are taxable if the customer acquires title to or the right to use the software.

Your company sells computer software and will provide data-conversion service that allows the customer to utilize the new prewritten software it is buying. Sales tax applies to services that are rendered in connection with sales of prewritten software, including:

Requirements analysis and feasibility studies, including economic and technical analysis of existing or potential computer hardware or software needs, identifying information and information access needs, and analyzing business-process analysis done to help a customer improve its information security, operations, quality control, budgeting, financial statements, etc.;
system design and development;
establishing the compatibility of the software with the hardware and other software products;
loading prewritten software into a computer;
configuring or setting up the software, provided these services do not involve changing the software's source code to meet the specific requirements of the purchaser (which would be software customization services); and
installing upgrades or enhancements. EDU-71R, Revised Sales Tax Guidelines: Taxing Charges for Computer Products and Services and Internet Related Sales and Services

These listed services are taxable whether the charges for them are separately stated on the customer's invoice or lumped together with other taxable charges.

These taxable charges do not include running a separate data-conversion program, if the charges for data-conversion service are separately stated on the customer's invoice. Running data-conversion software for a software customer is not considered to be part of the charges for configuring or setting up the customer's software, if the charges for data conversion are separately stated and the customer does not acquire title to or the right to use the data-conversion software. These same rules apply to charges for virus removal services and virus-removal software that a business provides to a customer who is buying canned software.

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked in the future by the operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or published revenue ruling, that materially effects this private letter ruling.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 08/23/2010 Date Modified: 08/23/2010

Table 1

Table 2