Were the requesting company's cloud software subscription and optional training taxable in South Carolina?

Plain-English summary

South Carolina Private Letter Ruling #20-4 holds that the requesting company's cloud-software subscription was taxable as online access to an application service provider. Its optional training was taxable when sold with the subscription but nontaxable when purchased later as a separate transaction.

The company hosted enterprise applications for information technology, security, human resources, customer service, workflow, collaboration, and routine-task automation. Customers accessed the applications over the Internet, entered their own information, and manipulated their own data. No software had to be loaded onto their equipment, and the provider did not manipulate customer data.

The Department treated the subscription as a taxable communications service because South Carolina includes online information and application-service-provider access within taxable communications. The statutory data-processing exclusion did not apply because the customers, rather than the provider, manipulated the data.

Training followed the underlying sale. When a customer bought trainer-led instruction in conjunction with or as part of the taxable subscription, the training charge entered gross proceeds or sales price and was taxable. When the customer bought training later in a transaction that was not connected with the subscription sale, the training charge was not taxable.

What this means for you

SaaS providers

Under this PLR's facts, browser-based access remained taxable even though the software stayed on the provider's servers. Hosting a customer on dedicated data-center hardware for a higher subscription fee did not change the stated conclusion.

Training and implementation teams

Document whether training is contracted for as part of the subscription sale or independently afterward. Location did not drive the ruling's distinction: training could occur at the customer's site, outside South Carolina, or by live video conference; the key was whether it was part of the software sale.

Billing teams

Separately listing a service charge does not remove it from gross proceeds when the service is part of the taxable sale. Maintain separate contracts and ordering records for genuinely independent training.

Common questions

Q: Was downloaded software covered by the taxable online-access conclusion?
A: The ruling notes one customer was allowed to download software for security reasons and states that downloaded software was not subject to sales and use tax under the cited Department guidance.

Q: Was all training taxable?
A: No. Training sold with the subscription was taxable; training bought separately and not as part of the subscription sale was not.

Q: Did the data-processing exclusion apply?
A: No. Customers entered and manipulated their own data, while the provider supplied access to the applications.

Citations and references

• S.C. Code Ann. § 12-36-60 — communications included in tangible personal property
• S.C. Code Ann. §§ 12-36-90 and 12-36-130 — gross proceeds and sales price
• S.C. Code Ann. §§ 12-36-910(B)(3) and 12-36-1310(B)(3) — communications sales and use tax
• S.C. Regulation 117-329.4 — online information and application-service-provider access
• Meyers Arnold, Inc. v. South Carolina Tax Commission, 285 S.C. 303, 328 S.E.2d 920 (1985)
• SC Revenue Rulings #03-5 and #17-2 — software-access and communications guidance cited by the ruling

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: PLR20-4.pdf

Original ruling text

STATE OF SOUTH CAROLINA

DEPARTMENT OF REVENUE
300A Outlet Pointe Blvd., Columbia, South Carolina 29210
P.O. Box 125, Columbia, South Carolina 29214-0575

SC PRIVATE LETTER RULING #20-4

SUBJECT:

Online Software Subscription Service and Training
(Sales and Use Tax)

REFERENCES: S.C. Code Ann. Section 12-36-910 (2014)
S.C. Code Ann. Section 12-36-1310 (2014)
S.C. Code Ann. Section 12-36-60 (2014)
SC Regulation 117-329 (2012)
AUTHORITY:

S.C. Code Ann. Section 12-4-320 (2014)
S.C. Code Ann. Section 1-23-10(4) (2005)
SC Revenue Procedure #09-3

SCOPE:

A Private Letter Ruling is an advisory opinion issued to a specific taxpayer by
the Department to apply principles of law to a specific set of facts or a
particular tax situation. It is the Department’s opinion limited to the specific
facts set forth, and is binding on agency personnel only with respect to the
person to whom it was issued and only until superseded or modified by a
change in statute, regulation, court decision, or another Departmental advisory
opinion, providing the representations made in the request reflect an accurate
statement of the material facts and the transaction was carried out as proposed.

QUESTIONS

1. Are charges by XYZ, Inc. to customers for its online software subscription service, as
   described in the facts, subject to the sales and use tax?
2. Are charges by XYZ, Inc. to customers for training, as described in the facts, subject to the
   sales and use tax?
   CONCLUSIONS
3. Charges by XYZ, Inc. to customers for its online software subscription service, as described
   in the facts, are subject to the sales and use tax under Code Sections 12-36-910(B)(3) and 1236-1310(B)(3).

1

2. Charges by XYZ, Inc. for training, as described in the facts, that are made in conjunction
with, or as part of the sale of, its online software subscription service are includable in “gross
proceeds of sales” or “sales price” and, therefore, subject to the tax. Charges by XYZ, Inc.
for training, as described in the facts, that are not made in conjunction with, or as part of the
sale of, its online software subscription service are not includable in “gross proceeds of
sales” or “sales price” and, therefore, not subject to the tax.
FACTS
XYZ, Inc. is a provider of enterprise cloud computing solutions that define, structure, manage,
and automate services across a global enterprise. Its service includes a suite of software
applications built on a single proprietary platform that automates workflow and provides
integration between related business processes.
XYZ offers software applications for information technology, security, human resources, and
customer service. These applications allow employees to collaborate on projects, to submit
intracompany requests, to prioritize tasks, and to automate routine tasks.
All of XYZ’s software applications are delivered to customers via the Internet. XYZ’s
customers enter data into the software applications and use the applications to manipulate their
own data. XYZ provides its customers access and use of software online, but does not
manipulate its customers’ data.
XYZ’s various software applications are hosted on XYZ’s servers. No software must be loaded
or downloaded onto a customer’s computers in order to run XYZ’s software service, and no
components of XYZ’s software must reside on a customer’s computer equipment. The software
in question is accessed through the Internet on servers owned or leased by XYZ. 1
XYZ provides its software by subscription. XYZ enters into a contract with each customer and
charges a subscription fee for the license to access and use the software. For an increased
subscription fee, customers may access the software on dedicated hardware in XYZ’s data
centers.
XYZ also offers an optional training service for a fee where customers receive instruction from a
trainer on the use of software applications. Training may take place at the customer’s location, at
XYZ’s location outside of South Carolina, or through a live video conference call. Customers
may purchase training in conjunction with the software subscription service or at a later date that
is not in conjunction with the sale of a software subscription service.

1

For one South Carolina customer, XYZ allows that customer to download its software for security purposes.
Downloaded software is not subject to sales and use tax. See SC Revenue Ruling #03-5.

2

LAW AND DISCUSSION
Code Section 12-36-910(A) imposes the sales tax and provides:
A sales tax, equal to [six] 2 percent of the gross proceeds of sales, is imposed upon
every person engaged or continuing within this State in the business of selling
tangible personal property at retail.
Code Section 12-36-1310(A) imposes a use tax and provides:
A use tax is imposed on the storage, use, or other consumption in this State of
tangible personal property purchased at retail for storage, use, or other
consumption in this State, at the rate of [six] 3 percent of the sales price of the
property, regardless of whether the retailer is or is not engaged in business in this
State.
Communications are by definition tangible personal property under Code Section 12-36-60. The
sale or use of communications is subject to sales or use tax under Code Sections 12-36-910(B)(3)
and 12-36-1310(B)(3), which impose the tax on the:
gross proceeds accruing or proceeding from the charges for the ways or means for
the transmission of the voice or messages, including the charges for use of
equipment furnished by the seller or supplier of the ways or means for the
transmission of the voice or messages.... (Emphasis added.)
It is the Department’s longstanding position that charges for the ways or means of
communication include charges for access to, or use of, a communication system (the manner,
method or instruments for sending or receiving a signal of the voice or of messages). SC
Revenue Ruling #17-2 addresses the application of the sales and use tax to a wide variety of
communication services. It provides that communication services such as telephone services,
paging services, answering services, cable television services, streaming services, satellite
programming services (including emergency communication services and television, radio,
music or other programming services), fax transmission services, voice mail messaging services,
e-mail services, and database access transmission services (on-line information services), such as
legal research services, credit reporting/research services, and charges to access an individual
website are communication services subject to the sales and use tax pursuant to Code Sections
12-36-910(B)(3) and 12-36-1310(B)(3).
SC Regulation 117-329.4 lists examples of taxable communication services and includes:
(k) Database Access Transmission Services or On-Line Information Services,
including, but not limited to, legal research services, credit reporting/research
services, and charges to access an individual website (including Application
Service Providers)[.] (Emphasis added.)
2
3

Code Section 12-36-1110 increased the state sales tax rate from 5% to 6% beginning June 2007.
Code Section 12-36-1110 increased the state use tax rate from 5% to 6% beginning June 2007.

3

SC Revenue Ruling #03-5 defines an Application Service Provider 4 as a company that provides
customers access or use of software on the company’s website and concludes that charges by an
Application Service Provider are subject to sales and use tax under Code Sections 12-36910(B)(3) and 12-36-1310(B)(3).
Based on the discussion above, charges for XYZ’s software subscription service are charges for
access and use of software via an Application Service Provider. Accordingly, charges for XYZ’s
software subscription service, as described in the facts, are subject to the sales and use tax. 5
Having established that the charges by XYZ to its customers for its online software subscription
service are subject to the sales and use tax, we must next examine whether charges for training
associated with the access to XYZ’s online software subscription service are taxable.
As noted above, the sales tax is imposed upon a retailer's “gross proceeds of sales” which is
defined at Code Section 12-36-90, in part, as:
...the value proceeding or accruing from the sale, lease, or rental of tangible
personal property...without any deduction for...the cost of materials, labor, or
service...[or] any other expenses[.]
The use tax is based upon the “sales price” of tangible personal property. The term “sales price”
is defined at Code Section 12-36-130, in part, as:
...the total amount for which tangible personal property is sold, without any
deduction for the cost of the property sold, the cost of the materials used, labor or
service cost, interest paid, losses, or any other expenses.
(1) The term includes:
(a) any services or transportation costs that are a part of the sale, whether paid in
money or otherwise[.]
In Meyers Arnold, Inc. v. South Carolina Tax Commission, 285 S.C. 303, 328 S.E.2d 920, 923
(1985), the Court of Appeals of South Carolina held the element of service involved in a lay
away sale was subject to tax as being part of the sale of tangible personal property. The test used
by the court was as follows:
...But for the lay away sales, Meyers Arnold would not receive the lay away fees.
The fees are obviously charged for the service rendered in making lay away sales.
For these reasons, this court holds the lay away fees are part of the gross proceeds
and subject to the sales tax.

4

The providing of software by an application service provider, as defined above, is also referred to as software as a
service (“SaaS”).
5
Since, as noted in the facts, XYZ does not manipulate customer data, the exclusion under Code Section 12-36910(C) for data processing does not apply.

4

Accordingly, the total amount charged in conjunction with the sale or purchase of tangible
personal property is subject to the tax.
Based on the above, charges by XYZ for training, as described in the facts, that are made in
conjunction with, or as part of the sale of, its online software subscription service are includable
in “gross proceeds of sales” or “sales price” and, therefore, subject to the tax. Charges by XYZ
for training, as described in the facts, that are not made in conjunction with, or as part of the sale
of, its online software subscription service are not includable in “gross proceeds of sales” or
“sales price” and, therefore, not subject to the tax.
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/W. Hartley Powell
W. Hartley Powell, Director
May 18, 2020
, 2020
Columbia, South Carolina
CAVEAT: This advisory opinion is issued to the taxpayer requesting it on the assumption
that the taxpayer’s facts and circumstances, as stated, are correct. If the facts and
circumstances given are not correct, or if they change, then the taxpayer requesting the
advisory opinion may not rely on it. If the taxpayer relies on this advisory opinion, and the
Department discovers, upon examination, that the facts and circumstances are different in
any material respect from the facts and circumstances given in this advisory opinion, then
the advisory opinion will not afford the taxpayer any protection. It should be noted that
subsequent to the publication of this advisory opinion, changes in a statute, a regulation, or
case law could void the advisory opinion.

5