Were fees for remote database access, customer-site computer terminals, and telephone auto-parts information subject to Rhode Island sales tax?

Plain-English summary

Remote access to the Company's auto-parts database and information supplied by telephone were nontaxable services. Customer-site computer-terminal charges were rentals, but the charges were not taxed because Company had elected to pay sales or use tax when it bought the terminals. That rental result required the terminals' sole Company use to be rental.

Company operated a Rhode Island auto-parts locator service using a central computer at its business. Customers could remotely access the database through a terminal, keyboard, and modem for a fixed monthly fee. If Company supplied the personal computer, it charged an additional monthly equipment fee.

Customers could also call with an auto-part request. A Company representative searched the database, made inquiries, and left the result in a voice-mail message available through a dedicated access code. Company charged per data request.

The Division said remote database access was a service, not a rental of tangible property, and was not “time-sharing” under Regulation SU 87-25. Telephone-supplied information was also nontaxable because no tangible personal property was sold.

The customer-site terminals were tangible-property rentals and ordinarily taxable on gross rental charges. But § 44-18-27 and Regulation SU 87-62 allowed a retailer to elect tax measured by acquisition cost instead. Company had paid that tax, so no additional tax applied to rental charges while the terminals were used solely for rental.

What this means for you

Information-service providers

The order distinguished access to a provider's computer and information from transfer or rental of equipment. The service fees were nontaxable under the 1992 rules.

Equipment rental businesses

The tax-at-purchase election avoided tax on later rental charges only because Company paid tax when acquiring the terminals and used them solely as rental property.

Accountants and tax professionals

Separate bundled revenue streams: database access, equipment use, and representative-supplied information received different analysis even though they supported one locator service.

Common questions

Was remote access to the central computer taxable? No. It was a service and not taxable computer time-sharing under the cited regulation.

Were terminal-use fees rentals? Yes. Company was a retailer of tangible personal property for those charges.

Why were the rental charges not taxed? Company elected to pay tax on the terminal purchase cost and had already paid it.

What condition applied to the terminal election? The sole Company use of the terminals had to be rental.

Were telephone information fees taxable? No. The representative provided information without selling tangible personal property.

Citations and references

• R.I. Gen. Laws § 42-35-8 — authority identified in the ruling heading.
• R.I. Gen. Laws § 44-18-27 — election to pay tax on the acquisition cost of rental property.
• Rhode Island Regulation SU 87-25 — computer time-sharing rule found inapplicable to remote access.
• Rhode Island Regulation SU 87-62 — rental-property election applied to the customer-site terminals.

Source

• Landing page: Rhode Island Declaratory Rulings
• Declaratory order: Declaratory Order 1992-04

Original ruling text

Ruling Request No. 92-04

Ruling Request No. 92-04

Re: Request for Ruling Pursuant to Section 42-35-8 of the General Laws of Rhode Island - Election to Pay Sales or Use on Purchase of Tangible Personal Property

Facts

A company with its principal place of business in Rhode Island provides an auto parts locator service for its customers using computer technology.

The company has purchased a central computer which is located at its business premises in Rhode Island. In addition, the company has purchased a number of personal computers which it holds available for placement at the business location of its customers. The company paid sales and use tax with respect to all of the above computer equipment, including both its central computer and the personal computers held available for placement on the premises of its customers.

The company provides a computerized auto parts locater service to its clients. It provides this service in two ways. First, customers may obtain direct access to the company's central computer and database via a personal computer terminal, keyboard and modem link on the customer's premises. The company charges a fixed monthly fee for access to its central computer. If the company provides its customer with a personal computer, the company charges a second fixed monthly fee for use of this equipment.

The company also provides auto parts locater services to customers in response to telephone requests. Customers contact a the company customer service representative by telephone with an auto part request. The customer service representative then enters the data request and obtains information concerning the availability and location of the desired auto part. In addition, the customer service representative may make inquiries. After obtaining the information, the customer service representative creates a "voice-mail" message containing the information which is left for the customer under a dedicated access code. The customer obtains the voice-mail message by calling the company's "800" telephone number and then entering his customer access code. The company charges a fee for each data request made by a customer.

Rulings Requested

1. The company charges to customers for remote location computer access to the company's central computer and database located in Rhode Island are not subject to Rhode Island Sales and Use Tax.

2. The company charges to customers for use of computer terminals placed on the customer's business premises are not subject to Rhode Island Sales and Use Tax.

3. The company charges to customers for information provided by the company customer service representatives in response to telephone inquiries are not subject to Rhode Island Sales and Use Tax.

Discussion

With respect to the ability to access the company's central computer and database, the company is providing a service and not renting tangible personal property. Although Regulation SU 87-25, section (3), provides that "time-sharing" of computers is taxable when the computer is physically located in this state, the ability of a customer of the company to access the computer is not considered "time-sharing" as that term is set forth in SU 87-25.

The rental of computer terminals would ordinarily be subject to tax based upon the gross amount of the rental charge. But where, as here, the retailer elects to pay the tax upon acquisition of the property to be rented, no tax is due on the rental of the property.

As to the information provided for a fee upon telephone inquiries, the sales/use tax does not apply since no tangible personal property is sold.

Rulings

1. The company is not a retailer with respect to charges for remote location computer access to the company's central computer and database located in Rhode Island. The company is deemed to be providing a service and not renting tangible personal property as the information retrieval performed by the customer is not considered time-sharing as that term is referred to in Regulation SU 87-25. Accordingly, these charges would not be subject to Rhode Island sales/use tax.

2. The company is a retailer of tangible personal property with respect to charges to customers for use of computer teminals placed in the customer's business premises. However, in accordance with RIGL 44-18-27 and Regulation SU 87-62, a retailer may elect to pay the tax as measured by the cost of the property to it rather than charging and collecting tax on the rental charge of the property.

Since the company has made its election and paid the tax at the time of the original purchase, the charges for the use of the computer terminals are not subject to the sales/use tax, provided the sole use of such terminals by the company is the rental thereof.

3. The company's charges to customers for information provided in response to telephone inquiries are not subject to sales/use tax.

This ruling may only be relied upon by the company and shall be vaild until the underlying factual presentation changes or the applicable statutory provisions are amended in a manner requiring a different result. (It should be noted that there are presently before the General Assembly proposals on the taxation of services which, if enacted, could alter these rulings).

**R. Gary Clark

Tax Administrator**

April 15, 1992