Are online ancestry and health-history reports generated from customers' saliva samples taxable in Rhode Island, and are the included specimen kits separately subject to use tax?

Plain-English summary

Rhode Island treated the taxpayer's online ancestry and health-history reports as taxable vendor-hosted prewritten computer software. Sales to Rhode Island customers were retail sales in the state, and the taxpayer's one-time products, add-ons, and recurring subscriptions were taxable on the described facts.

Customers collected saliva with kits mailed by the taxpayer, returned the samples to an out-of-state laboratory, and accessed individualized DNA reports through the taxpayer's website. The Division reasoned that customers were buying access to software that processed and presented those reports online. The software was prewritten because it was not designed for a specific purchaser, and the facts did not show that it was customizable.

The specimen kit represented only 1% of the transaction cost. Bundling it with the software did not change the software's taxability. The kit was not separately subject to use tax because it was included in the taxable sales price of the software.

What this means for you

Online ancestry and health-report providers

If Rhode Island customers access individualized reports through a vendor-hosted website, the Division may classify the product as taxable hosted prewritten software even though laboratory analysis and report generation occur outside the state.

Subscription software sellers

The ruling covered both one-time purchases and recurring subscriptions. The key classification was access to non-custom vendor-hosted software, not the length of the customer's access.

Businesses including physical kits with digital products

An inexpensive physical kit did not make the transaction nontaxable. Here, the taxable software classification controlled the bundle, while the kit had no separate use-tax charge because its cost was included in the software price.

Common questions

Where were sales to Rhode Island customers treated as occurring? The Division said they were retail sales in Rhode Island.

Why were the reports classified as software? Customers used the taxpayer's website to access data and reports generated through coded computer instructions.

Was the software prewritten? Yes. It was not designed to a specific purchaser's specifications, and the record contained no facts showing customization.

Did including the saliva kit make the transaction nontaxable? No. The vendor-hosted prewritten software remained taxable when bundled with tangible personal property.

Was the kit separately subject to use tax? No. It was included in the software's sales price.

Citations and references

• R.I. Gen. Laws § 44-18-7(15) — vendor-hosted prewritten computer software included in taxable sales.
• R.I. Gen. Laws § 44-18-7.1(c), (g)(ii), (g)(vi), and (g)(vii) — bundled transactions and the software definitions used in the order.
• R.I. Gen. Laws §§ 44-18-8 and 44-18-18 — retail sales and the sales-tax imposition.
• R.I. Gen. Laws § 44-18-20(a) — complementary use tax.
• R.I. Gen. Laws §§ 44-18-12(a), 44-18-13, and 44-18-16 — sales price, gross receipts, and tangible personal property.
• Great Lakes Dredge & Dock Co. v. Norberg, 369 A.2d 1101, 1106 (R.I. 1977) — purpose of Rhode Island's use tax.

Source

• Landing page: Rhode Island Declaratory Rulings
• Declaratory order: Declaratory Order 2025-01

Original ruling text

Ruling Request No. 2025-01

Declaratory Order 2025-01

Request for Ruling Regarding theApplication of Rhode Island’s Sales and Use Tax

Taxpayer requests a ruling to determine the answers to the following questions related to how Rhode Island will treat Taxpayer’s sales to its customers for sales and use tax purposes:
1. Where is the service to the customers deemed to be provided?
2. If the service is deemed to be provided in Rhode Island, how will the state categorize the service being provided to Taxpayer’s customers?
3. Given the use of tangible personal property (the specimen kit) to perform the service, would the state consider the service bundled with the property to be taxable?
4. Are the kits used by the customers to collect the samples subject to use taxes in the state of Rhode Island?

Facts

The facts set forth below are taken from the statement of facts presented in the Ruling Request.

Taxpayer is a company based outside of Rhode Island and is an online provider of ancestral and health history reports to individual customers. Taxpayer operates a distribution center and laboratory outside of Rhode Island. Taxpayer’s reports are generated from the company's analysis of its customers' DNA from saliva specimens. Customers collect their own saliva with a kit that Taxpayer mails to them from the distribution center and then mails their specimens to the laboratory. After the laboratory processes the DNA specimens, customers can access individualized, personal reports through Taxpayer’s website. The cost of the kit relative to the service is insignificant (1% of the total transaction cost).

The following facts are responses to additional questions from the undersigned. Taxpayer charges its customers for different products ranging from one-time regular product or add-on purchases that can vary depending on sales to recurring subscription products that can last from several months to a year at a time.

Pertinent Law

Under the Rhode Island General Laws, “[a] tax is imposed upon sales at retail in this state…at the rate of [seven percent (7%)] of the gross receipts of the retailer from the sales or rental charges . . . .” R.I. Gen. Laws § 44-18-18.**** A “retail sale” or “sale at retail” is defined as “any sale, lease, or rentals of tangible personal property…or services as defined in § 44-18-7.3 for any purpose other than resale, sublease, or subrent in the regular course of business.” R.I. Gen. Laws § 44-18-8. A comparable excise tax “is imposed on the storage, use, or other consumption in this state of tangible personal property…purchased from any retailer at the rate of [seven percent (7%)] of the sale price of the property.” R.I. Gen. Laws § 44-18-20(a). “Use” is defined by R.I. General Laws § 44‑18‑10 as “the exercise of any right or power over tangible personal property incident to the ownership of that property…”The use tax is a complement to the sales tax, the purpose of which is to prevent tax avoidance and prevent an unfair burden being placed upon local retailers who must compete with retailers in other states who are exempt from the sales tax. Great Lakes Dredge & Dock Co. v. Norberg, 369 A.2d 1101, 1106 (R.I. 1977). Collectively, the two taxes are referred to as the Sales and Use Tax.

R.I. Gen. Laws § 44-18-7 specifically defines the term “sales.” In section (1) of the statute, “sales” means “[a]ny transfer of title or possession, exchange, barter, lease, or rental, conditional or otherwise, in any manner or by any means of tangible personal property for a consideration. ‘Transfer of possession,’ ’lease,’ or ‘rental’ includes transactions found by the tax administrator to be in lieu of a transfer of title, exchange, or barter.” Other transactions also defined as sales include “(15) The sale, storage, use, or other consumption of vendor-hosted prewritten computer software as defined in § 44-18-7.1(g)(vii)…For the purposes of subsections (14) through (16) above, ‘sale’ includes, but is not limited to, any license, lease, or rental of the products enumerated in those subsections.”

R.I. Gen. Laws § 44-18-7.1(c) defines a “bundled transaction” as “the retail sale of two or more products, except real property and services to real property, where (1) The products are otherwise distinct and identifiable, and (2) The products are sold for one non-itemized price.”

R.I. Gen. Laws § 44-18-7.1(g)(ii) defines the term “computer software” as “a set of coded instructions designed to cause a ‘computer’ or automatic data processing equipment to perform a task.” R.I. Gen. Laws § 44-18-7.1(g)(vi) defines “prewritten computer software” as any “computer software…that is not designed and developed by the author or other creator to the specifications of a specific purchaser…‘Prewritten computer software’…that is modified or enhanced…to the specifications of a specific purchaser, remains ‘prewritten computer software…’” R.I. Gen. Laws § 44-18-7.1(g)(vii) defines “vendor-hosted prewritten computer software” as “prewritten computer software that is accessed through the internet and/or a vendor-hosted server regardless of whether the access is permanent or temporary and regardless of whether any downloading occurs.”

R.I. Gen. Laws § 44-18-7.1(z)(i)(G)(1) excludes from the broader category of telecommunications services “data processing and information services that allow data to be generated, acquired, stored, processed, or retrieved and delivered by an electronic transmission to a purchaser where such purchaser’s primary purpose for the underlying transaction is the processed data or information…”

R.I. Gen. Laws § 44-18-7.3(a) defines “services” as “all activities engaged in for other persons for a fee, retainer, commission, or other monetary charge, which activities involve the performance of a service in this state as distinguished from selling property.”
The obligation to charge, collect, and remit the sales tax to the Tax Division is upon retailers, pursuant to R.I. Gen. Laws §§ 44-18-18 and 44-18-19, and the obligation to declare and pay the use tax on untaxed purchases that were taxable, is upon the consumer, pursuant to R.I. Gen. Laws § 44-18-21. A “retailer” under the Sales and Use Tax is defined as “[e]very person engaged in the business of making sales at retail,” but specifically includes others within the statutory definition of a retailer. R.I. Gen. Laws § 44-18-15(a)(1).

R.I. Gen. Laws § 44‑18‑7.3 defines “services” as “all activities engaged in for other persons for a fee…which activities involve the performance of a service in this state as distinguished from selling property.” The services set forth in § 44‑18‑7.3 are subject to sales and use taxes.

For purposes of computing the tax, a retailer’s “gross receipts” are “the total amount of the sale price, as defined in § 44-18-12…of the retail sales of retailers.” R.I. Gen. Laws § 44-18-13. “‘Sales price’ applies to the measure subject to sales tax and means the total amount of consideration, including cash, credit, property, and services, for which personal property or services are sold, leased, or rented, valued in money, whether received in money or otherwise….” R.I. Gen. Laws § 44-18-12(a).

R.I. Gen. Laws § 44-18-16 defines “tangible personal property” as “personal property which may be seen, weighed, measured, felt, or touched, or which is in any other manner perceptible to the senses” and “includes…prewritten computer software.”

Under R.I. Gen. Laws § 44-18-25, all gross receipts are presumed to be subject to sales and use tax “until the contrary is established to the satisfaction of the tax administrator. The burden of proving to the contrary is upon the person who makes the sale and the purchaser, unless the person who makes the sale takes from the purchaser a certificate to the effect that the purchase was for resale.”

Taxpayers claiming statutory tax benefits must demonstrate not only that a tax exemption or deduction exists but that they clearly and unequivocally come within the ambit of its provisions. Cookson v. Clark , 610 A.2d 1095, 1098 (R.I. 1992); R.I. Lithograph Corp. v. Clark , 519 A.2d 589, 591*(R.I. 1987). Furthermore, statutes conferring such tax benefits must be strictly and narrowly construed, Fleet Credit Corp. v. Frazier , 726 A.2d 452, 454 (R.I. 1999); Rice Mach. Co. v. Norberg , 391 A.2d 66, 70 (R.I. 1978); Red Fox Gingerale Co. v. Norberg , 217 A.2d 466, 467 (R.I. 1966), with all doubts and ambiguities resolved against the taxpayer and in favor of the taxing authorities. Roger Williams Gen. Hosp. v. Littler , 566 A.2d 948, 950 (R.I. 1989); Am. Hoescht Corp. v. Norberg ,* 462 A.2d 369, 371 (R.I. 1983).

Discussion

1. Sales made to customers in Rhode Island are sales at retail in Rhode Island and are taxable in this state. R.I. Gen. Laws § 44-18-18.****

2. Taxpayer sells a subscription to ancestral and health history reports that analyze customers’ DNA data from saliva samples. Customers provide a saliva sample to Taxpayer via a kit that Taxpayer mails to its customers. Based on the information provided, Taxpayer sells access to software that allows customers to access ancestral and health history reports online. It is clear that Taxpayer sells access to “a set of coded instructions designed to cause a ‘computer’ or automatic data processing equipment to perform a task.” R.I. Gen. Laws § 44-18-7.1(g)(ii). Taxpayer could not share the ancestral and health history information with its clients if the product were not computer software. Such software also meets the definition of prewritten computer software since it “is not designed and developed by the author or other creator to the specifications of a specific purchaser…” R.I. Gen. Laws § 44-18-7.1(g)(vi). There are no facts indicating that such software is customizable.

The software at issue is vendor-hosted as it “is accessed through the internet and/or a vendor-hosted server regardless of whether the access is permanent or temporary and regardless of whether any downloading occurs.” R.I. Gen. Laws § 44-18-71(g)(vii). The key feature of the product is Taxpayer’s website that allows Taxpayer’s clients to view data and reports per their subscription. For this reason, the product is vendor-hosted prewritten computer software.

3. Since the product is considered to be taxable vendor-hosted prewritten computer software, it is taxable regardless of whether it is bundled with other tangible personal property.

4. The kits would not be subject to use tax since they would be included with the sales price of the software.

Ruling

Based on the facts provided, Taxpayer’s product is taxable in Rhode Island as vendor-hosted prewritten computer software.

This ruling is limited to the facts stated herein and may be relied upon by Taxpayer and shall be valid unless (1) expressly revoked, (2) the applicable statutory provisions of law are amended in a manner that requires a different result, (3) the underlying facts described herein materially change, or (4) a decision on point has been issued by the Rhode Island or Federal courts.

Neena S. Savage
Tax Administrator
January 29, 2025