Is a company's website-hosting, database, and website-design business taxable in Utah when its servers and software sit outside the state?

Plain-English summary

A company already conceding it has Utah sales tax nexus asked the Commission to walk through the taxability of its many e-commerce revenue streams: application hosting (with four server/storage tiers), maintenance and technical support, software customization and "module" set-up, website design and development, website content creation, and various incidental "overhead" charges (computer time, communications). The Commission worked through each, applying the same canned-vs-custom software and possession-based framework used elsewhere in this corpus's Utah software rulings (see PLR 01-027, 19-003):

Application hosting is not taxable, assuming (as the Commission did here) that the company's software and hardware stay physically outside Utah and customers never download anything to a Utah computer. Accessing software or data at a host site without downloading it isn't a taxable "possession" of tangible personal property, and Utah doesn't tax that access as a rental/lease either. Leasing disk space is normally taxable as a lease of tangible personal property under § 59-12-103(1)(k) — but only if the leased property is physically located in Utah. Disk space on servers outside Utah isn't reached by Utah's tax at all.

Maintenance and technical support tied to a nontaxable hosting arrangement is also nontaxable, following straight from the underlying hosting service being nontaxable. (Rule 92(C) separately exempts custom-software maintenance/consulting charges regardless.)

Software customization and "module" charges are nontaxable if separately stated. Adjusting canned software to a customer's environment (name changes, minor protocol tweaks) doesn't turn it into exempt custom software on its own — but the Commission treats charges for that customization work as nontaxable services as long as they're billed separately from any taxable charge; combining them with a taxable charge makes the whole thing taxable.

Website design and development is treated as nontaxable custom software creation (assuming the code is genuinely unique to that one customer), and separately, website content creation is nontaxable if created and delivered entirely outside Utah.

Graphic design services for content created/delivered in Utah get a "true object" analysis under Rule R865-19S-111: even though a customer receiving a designed website is technically receiving tangible personal property, the Commission concluded the customer is really purchasing the company's design expertise as a service, not the TPP itself — because that expertise is what makes the website work — so the charge is nontaxable, absent facts showing otherwise.

Computer-time and communications/overhead charges just follow the taxability of what they're attached to: nontaxable if tied to accessing non-downloaded software, taxable if tied to downloading software to a Utah location or using Utah-based hardware; an "overhead" charge bundled with a taxable sale is itself taxable, and bundled with a nontaxable sale is itself nontaxable.

What this means for you

SaaS and cloud-hosting businesses

Keeping your servers, storage, and software physically outside Utah — and structuring your service so customers access rather than download — is the key fact pattern that kept this business's hosting revenue entirely out of Utah's sales tax base. If any of that infrastructure or the point of download moves into Utah, the analysis flips.

Web design and development agencies

Custom website design, treated as unique custom software creation, and graphic design work (even though it technically results in a form of "tangible personal property," a website) can both come out as nontaxable services under Utah's true-object test — but keep design/development charges separately stated from anything taxable, since bundling drags the whole charge into the tax base.

Accountants and tax professionals

This ruling is a useful companion to PLR 01-027 for the same canned/custom and possession-based reasoning, applied specifically to hosting infrastructure location and the graphic-design true-object test under Rule R865-19S-111. Note the Commission built its answer on several explicit factual assumptions (infrastructure outside Utah, no downloads to Utah, data transferred is not itself canned software code) — a materially different fact pattern would need its own analysis.

Common questions

Q: Is SaaS/cloud hosting taxable in Utah?
A: Not under this ruling's framework, if the provider's servers/software stay outside Utah and customers only access rather than download.

Q: Is website design taxable as a sale of tangible personal property?
A: The Commission treated it as a nontaxable service (custom software creation / true-object graphic design), not a taxable TPP sale, even though a finished website is technically tangible personal property.

Q: Are "overhead" charges like computer time or communications taxable?
A: They follow whatever they're billed with — taxable if bundled with a taxable charge, nontaxable if tied to a nontaxable service.

Q: Can I rely on this 2001 ruling today?
A: Not directly — it binds the Commission only for the taxpayer and facts it addressed (including several explicit assumptions), and Utah's digital-products and software statutes have developed further since 2001. Verify current law before relying on it.

Citations and references

Statutes:

• Utah Code Ann. § 59-12-103(1)(k) (lease of tangible personal property)

Rules:

• Utah Admin. Rule R865-19S-92 (canned vs. custom computer software; services exemption)
• Utah Admin. Rule R865-19S-111 (taxability of graphic design incorporated into tangible personal property)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/01-030.htm

Original ruling text

REQUEST LETTER

01-030

Response 11/27/01

NAME

COMPANY

ADDRESS

Dear Sir or Madam:

We are seeking assistance from the Tax Commission
with regard to the taxability of certain transactions as they pertain to sales
and use taxes. In writing the following
text, we are aware that substantial nexus is created by our client�s activities
and that Utah sales and use tax must be collected on any taxable transactions.

Our client (�Company Z�) provides commercial
customers with an integrated electronic commerce solution, which consists of
canned and/or customized software, application hosting services, and other
services designed to automate the Customer�s business functions. Most revenues are realized through the
execution of contracts for the license to use the Product, however, the access
to this license is typically via the Internet.
License agreements are typically structured for a three-year term, and
automatically renew at the end of the term for additional one-year periods,
unless terminated earlier by either party.
During the term of the contract, Company Z realizes several standard
revenue streams related to the Customer�s utilization of it�s product and
services: monthly subscription fees, license revenue, maintenance revenue and
revenue for services billed on a time and materials basis (i.e. consulting
services).

The following is a list of products/services for
which we are seeking sales/use tax guidance:

-
Application Hosting Services

Usage
and Hosting Services

Hosting of Company Z�s Software

Hosting of Third Party Software

Network
and Server Hosting Services

Shared Server Option

Premium Shared Server Option

Single Dedicated Server Option

Dual Dedicated Server Option

-
Application Maintenance and Technical Support

Database/Network
Administration

-
Consulting and Development Services

Customization
of Software

Set
up of Software Modules

Website
Design and Development

Website Hosted on Company Z�s Site

Website Hosted by Customer

Website
Content

• Other
  Incidental Services / Overhead

Computer
Time

Communications Charges

The
following is a list of descriptions of the above products/services for which we
are seeking sales/use tax guidance:

• Application Hosting Services

• Company Z has the ability to host, maintain, and support its
  customers� e-Businesses, at the customer�s option. Hosting services include network
  services within Company Z�s data center outside Utah accessed by
  customers via the customer�s ISP connection. Hosting Services include all network hardware (except (c)
  & (d)), maintenance of such hardware/software and security
  services. Basically, it�s an
  outsourced technology department.
  Customers can opt to have Company Z host Company Z�s software
  modules or the customer�s own separate software licenses.
  Server Options �Customers may select from one of four server options under the Hosting Services agreement:

(a) Shared Server Option, which entitles the customer to 4 gigabytes of disk space for storage, 4 gigabytes maximum data transfer per month (bandwidth), access to the SQL server 7.0, an Internet connection license, a Verisign certificate, and PC Anywhere. PC Anywhere (software that allows the customer�s PC to communicate with Company Z�s network) is separately licensed and paid for by the customer from a third party.

(b)
Premium Shared Server Option, which entitles the customer to a maximum of
3-5 sites per year on a shared web server, a maximum of 3-5 sites per year on a
shared data server, 10 gigabytes of disk space for storage, 5 gigabytes maximum
data transfer per month (bandwidth), access to the SQL server 7.0, an Internet
connection license, a Verisign certificate, and PC Anywhere (see above). PC Anywhere is separately licensed and paid
for by the customer from a third party.

(c)
Single Dedicated Server Option, which includes one web/data/application
server, server maintenance, and 6 gigabytes maximum data transfer per month
(bandwidth). Customer provides hardware
and operating system.

(d)
Dual Dedicated Server Option, which includes one web/application server,
one data server, server maintenance; and 6 gigabytes maximum data transfer per
month (bandwidth). Customer provides
hardware and operating system.

�
Customers are charged a flat monthly fee for any of the aforementioned
server options (a-d).

• Application Maintenance and Technical Support

• In accordance with the hosting services, the service center outside
  Utah is made available to customers for call-in service.

• No charge is made for call-in support.
• Database and network administration is furnished by Company Z
  subject to staff availability, but they it is not incorporated into the
  standard service agreement.

• Such services are billed on a time and materials basis.

• Consulting & Development Services

• Consultants deal with all aspects of e-Business, including:
• Customization of Software to the customer�s working environment,
  such as name changes and minor modifications within the software
  protocol. Customization charges
  relate to services of making adjustments or changes to existing
  programming included within the canned software product. Programming that is not preexisting
  within the canned software are not included under this classification.
• Set up of Software Modules to enhance Company Z�s software to
  achieve specific needs of the customer. This entails additional
  programming to enhance Company Z�s software. Software modules are created at the request of the
  customer and not included as part of the canned software product.

o
Consulting services that include the design and development of the
customer�s Internet website. Websites,
if not hosted by Company Z, are delivered via the Internet.

o
In addition to developing a website, Company Z will also develop website
content which may contain information, communications, software, photos, text,
video, graphics, music, sounds, images, or other materials and services. Such content is delivered via the internet.

�
Company Z could host the website outside Utah.

�
The customer could host the website.

�
Website design and development is separately charged from the development
of website content.

�
Such services are billed on a time and materials basis.

�
Other
Incidental Services / Overhead

o
Incidental expenses, including computer time and communications charges
that are separately stated on the invoice and charged with consulting-type
services. Computer time is really an
administrative charge based on minutes/hours of use, while communications are
another type of administrative charge.
Communications are NOT the reselling of telecommunications services, but
merely an overhead charge.

�
Expenses are separately stated on each invoice.

Assuming that Utah has
jurisdiction to tax Company Z, please advise as to whether each
revenue-generating product or service is subject to sales/use taxation in
Utah. Please assume that all base fees
are separately stated on invoices sent to the Customer.

Under separate
circumstances, please advise as to whether the true object of Company Z�s
Product is providing various services.
Accordingly, if a single lump fee is charged, could the revenues from
the product be classified by the State either in whole or part as nontaxable
services?

It would be helpful if you
would direct us to specific citations in Utah statutes, regulations, or rulings
when applicable.

Would you please provide us
with your name, position, and a telephone number where we may reach you if we
need further clarification.

If you should have any
questions regarding the Product or any of the accompanying services provided by
Company Z, please feel free to contact me at PHONE

(EMAIL) or NAME at
PHONE (EMAIL)

Sincerely,

NAME

COMPANY

RESPONSE LETTER

DATE

NAME

COMPANY

ADDRESS

RE: Advisory
Opinion � Application of Sales Tax on Services to Host Websites and Maintain
Databases

Dear Mr. NAME

You have requested information concerning the taxability
of services offered by your client (�Company�), which has sales tax nexus with
Utah. These services primarily consist
of providing canned and/or custom software, �hosting� customers� websites, and
automating customers� business functions.
You have provided descriptions of and asked for sales tax direction on
the various services offered by the Company.
Before addressing each of these services, we
first offer some general observations concerning the taxation of computer
software in Utah.

Utah
Admin. Rule R865-19S-92 (�Rule 92�) (copy enclosed) provides that the sale of
�canned computer software� (prewritten computer software) is taxable, while the
sale of �custom computer software� (programs written specifically for a
particular user) is not. Nevertheless,
canned computer software may be individually modified to a limited extent
without it becoming custom software. As
a general threshold, adding a customer=s
name or other superficial adaptations is not enough to qualify the software as
custom software. Similarly, bundling
several prewritten software components together into a set for a particular
customer does not change the software�s character from Acanned@ to Acustom@ software. To become custom computer software, the
adaptations must be sufficient to change the functional operation of the
software. Whether the final software
product is �canned� or �custom� depends on the circumstances surrounding the
development of each product and the nature of the programs that comprise it.

Utah currently applies its sales and use tax if the
customer receives possession of canned computer software, whether the software
is received on disk or downloaded by electronic means. On the other hand, if a customer goes to an
Internet site to access software without downloading it on his or her own
computer, then the customer has not received possession of the tangible
personal property; i.e., the canned computer software.[1] Nor does Utah currently impose the sales and
use tax in this latter circumstance under the theory of renting or leasing
tangible personal property because the customer does not have possession of the
tangible personal property.
Accordingly, for electronic transactions, the software must at least
temporarily �reside� in the customer�s computer for the transaction to be the
taxable sale of tangible personal property.
Accessing software at a �host� provider site without downloading the
software onto ones computer is not a taxable transaction.

In providing its hosting services, we assume the Company
retains physical possession of all software and hardware at a facility outside
Utah and that its customers do not download the software to its computers in Utah. We also assume that the data transfer you
describe is not the transfer of computer code that comprises canned computer
software, but is the transfer of data relating to information in a database or
marketing and sales information relating to the customer�s eBusiness. Under these circumstances, there has been
no sale of any computer software in Utah that is subject to taxation.

In
addition, your descriptions of the various �server options� offered by the
Company indicate that customers are entitled to a certain amount of disk space
for storage. We assume the disk space
is located outside of Utah. While the
leasing of disk space in Utah for storage would typically be viewed as the
lease of tangible personal property and, therefore, taxable under Utah Code
Ann. �59-12-103(1)(k), it is not subject to taxation by Utah when the property
being leased is located in another state.

Subject
to assumptions made above and the information you have provided, we find that
the Company�s �application hosting services� are not subject to Utah�s sales
and use tax.

As for other charges associated with the hosting
services, Subsection (C) of Rule 92 provides that �[c]harges for services such
as software maintenance, consultation in connection with a sale or lease,
enhancements, or upgrading of custom software are not taxable� (emphasis
added). However, charges for these
services made in connection to the sale of canned computer software are
taxable.

Should any of the Company�s charges for maintenance and
technical support be related to the sale of taxable canned computer software,
any charges relating to the maintenance or upgrading of that software might
also be taxable, in addition to any consulting charges in connection with the
sale or lease. However, as we have
previously found that there has been no taxable sale or lease of tangible
personal property under the circumstances you described as �application hosting
services,� the �application maintenance and technical support� charges you
describe would also be nontaxable.

You do not describe these services as occurring only at a
location outside of Utah, in which case they would be nontaxable under the
circumstances previously described. Accordingly, our response below will assume
that the services are performed in Utah (i.e., the services are performed on
software/hardware located in Utah or the product on which the services are
performed is delivered to a customer in Utah).

As previously discussed, customizing software to a
customer�s working environment without altering its underlying functional
operation does not change canned computer software into custom software. Nevertheless, any charges to perform such
�customization� services are nontaxable if stated separately from taxable
charges. Should such charges be
combined with taxable charges, however, the entire charge is taxable. Creating �software modules� at the request
of a customer to enhance canned computer software would be considered
nontaxable customization charges if stated separately from taxable charges.

For
consulting services involving the �design and development� of websites, we
assume that such services relate only to an individual client; i.e., that the
computer code written to design and develop a specific customer�s website is
unique. In this case, such design and
development services would be considered the �creation� of custom computer
software, the sale of which under Rule 92 is nontaxable.

In addition to developing the computer code that
results in a website, you also provide services to provide the �content� placed
on that website. This content may
consist of information, communications, software, photos, text, video,
graphics, music, sounds, and images. If the website is hosted outside of Utah
and none of the content is created or delivered in Utah, then the services are
nontaxable.

For content created in Utah or delivered in Utah,
further analysis is needed. Charges for
graphic design services may be taxable under Utah Admin. Rule 865-19S-111 (copy
enclosed) if the design services for the photos, text, video, graphics, etc.,
are incorporated into tangible personal property and the object of the
transaction is for the tangible personal property. A customer who receives a website designed by the Company is in
possession of tangible personal property.[2] Accordingly, whether the graphic design
services are taxable depends on whether the customer is primarily purchasing
the Company�s expertise in knowing what designs work best on a website and how
to incorporate the various designs into a website, or whether it is primarily
purchasing a website with the Company�s design services being a secondary
concern. Naturally, such a
determination would be dependent upon the facts surrounding each
transaction. However, we would consider
the Company�s expertise in designing the content of a website to be of
paramount importance in the success and function of a website. So, although the customer is receiving
tangible personal property in the form of a website, we would, without further
information convincing us otherwise, determine that the customer was purchasing
nontaxable graphic design services, not taxable tangible personal property.

As
discussed previously, charges to access computer software that is not
downloaded to the customer�s computer are nontaxable. Accordingly, for �computer time� charges that relate to accessing
canned computer software that is not downloaded, the charges are
nontaxable. If, however, they relate to
downloading canned computer software to a Utah location or the use of hardware
located in Utah, then the charges would be considered taxable as the sale or
lease of tangible personal property.

You
state that the Company�s �communications� charge represents an �overhead�
charge. If this charge is associated with a taxable sale, it is considered part
of the sale price of the taxable item or service and, thus, is taxable itself. If the communication, or overhead, charge
were associated with a nontaxable item or service, then it would be nontaxable,
as well.

For questions concerning the application of sales and
use tax in Utah, you may contact Taxpayer Services at (801) PHONE. Should you need further clarification from
the Commission, please contact us.

For
the Commission,

Marc
B. Johnson

Commissioner

MBJ/KC

01-030

[1] As an example, if a legal database company
sends a compilation of all State cases to a customer either in a book, on a
disk, or by downloading them electronically, the company has sold tangible
personal property. However, Utah does
not currently charge sales and use tax on a transaction that allows the
customer to use the Internet to view the State cases for a fee on a �host
provider,� as long as the customer does not download the software onto his or
her own computer.

[2] In COMPANY. Utah Tel. Ass'n v. Auditing
Div. Of the Utah State Tax Comm'n, 951 P.2d 218 (Utah 1997), the Utah
Supreme Court determined that the electronic signals of installed software are
tangible. Accordingly, a customer who
receives computer software is in possession of tangible personal property.

[3] On the other hand, should the design of a
website entail only the bundling of pre-existing programs into a unique website
for a specific client, we would probably consider this purchase the sale of
canned computer software, not design services.
Under such circumstances, the purchase would be taxable.