If a company bills customers a single monthly 'terminal rental' charge that covers a leased computer terminal, software, and a financial-data feed, is the whole charge taxable, or only the equipment-rental part?

Plain-English summary

A CPA asked the Tax Commission whether a client's monthly charge to customers -- covering a leased computer terminal, proprietary software, and a stream of financial/market information delivered to that terminal -- was subject to Utah sales or use tax. The customer's invoice labeled the whole thing a single "Terminal Rental" charge and taxed the full amount.

The Commission's Auditing Division separated the transaction into its pieces:

1. The equipment rental is taxable. Utah Code Section 59-12-103(1)(k) taxes rentals or leases of tangible personal property, and leasing a computer terminal (and the software running on it) is exactly that.
2. A separately billed information/data service, by itself, is not taxable. Receiving data or information via the terminal is a service, not a rental of property.
3. But bundling defeats the exemption. Because the company's invoices didn't distinguish between hardware, software, and information-service charges -- everything was one undifferentiated "Terminal Rental" line -- the Commission taxed the entire monthly charge. The rule is: nontaxable services separately billed from taxable rentals/sales are exempt, but an undifferentiated bundled charge is taxed in full.
4. The ruling also flags a contrast with a similarly-situated competitor: that other company reportedly furnished terminals to customers without a separate rental charge (bundling equipment cost into the free-of-charge service relationship), which the Commission treated differently -- exempt from sales tax on the service charge, but the vendor itself owed use tax based on the cost of the equipment it placed with customers in Utah, since it wasn't renting/selling the equipment as a distinct taxable transaction.

The captured record also includes a follow-up letter from a different company in the same industry, describing its own similar "lease" structure and referencing that prior advisory opinion to the competitor, and asking the Commission to determine its own tax liability. No Commission response to that follow-up letter is in the available record for this ruling -- it's included here as background on the same industry issue, not as part of this ruling's holding.

What this means for you

Businesses that lease equipment bundled with an information or data service

If you want the service portion of your charge to be nontaxable, separately state it on the invoice from the taxable equipment/software rental. A single combined line item (like "Terminal Rental") pulls the whole charge into the tax base even if part of what you're providing is a pure service.

Businesses that provide equipment for free alongside a paid information service

Structuring the relationship so equipment is furnished without a separate rental charge can keep the service charge itself out of the sales tax base -- but expect to owe use tax on the equipment's own cost as the vendor placing that property into service in Utah, rather than passing rental tax through to the customer.

Accountants and tax professionals

This is a clean "separately stated defeats bundling" illustration under § 59-12-103(1)(k), plus a useful contrast on how the tax burden shifts (customer-facing sales/use tax on a rental charge vs. vendor-side use tax on owned equipment cost) depending on whether the vendor charges rent for the hardware or simply provides it as part of an information-service relationship.

Common questions

Q: Is receiving financial data through a leased terminal taxable in Utah?
A: The data/information service itself is not taxable. The terminal and software rental is taxable. The two are only separately treated if they're separately stated on the bill.

Q: What happens if hardware, software, and data charges are billed as one combined amount?
A: The whole combined amount becomes taxable, per this ruling -- bundling a taxable rental with a nontaxable service without breaking out the charges pulls everything into the tax base.

Q: If a vendor furnishes the terminal for free instead of renting it, does that avoid tax entirely?
A: Not entirely -- per the ruling's discussion of a similarly-situated competitor, the service charge itself may then be exempt from sales tax, but the vendor becomes liable for use tax on the cost of the equipment it places with Utah customers.

Q: Can I rely on this ruling for my own bundled equipment-and-data-service billing?
A: Not automatically -- it binds the Commission only for the taxpayer and facts presented (an undifferentiated "Terminal Rental" charge). If you separately state your charges, or structure equipment provision differently, your result could differ.

Citations and references

Statutes:

• Utah Code Section 59-12-103(1)(k) (sales/use tax on rentals or leases of tangible personal property)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/91-030.pdf

Original ruling text

January
31, 1992 Response from Tax
Commission

December
23, 1991 Letter from XXXXX of XXXXX,
CPA

XXXXX

Re:
Advisory Opinion -XXXXX

Dear
Mr. XXXXX:

This
letter is in response to your recent request for a Tax Commission ruling on
whether the monthly XXXXX charges are subject to sales or use tax. The charge
is for the lease of a computer terminal, the use of XXXXX software and the
receipt of XXXXX information. XXXXX's invoice to its customer is a single
monthly charge labeled "terminal rental." Tax is collected on the total charge.

The
Tax Commission policy is to refer such requests to the division most qualified
to analyze the request and make recommendations concerning it. As such, your request was referred to the
Tax Commission's Auditing Division for their analysis and recommendations. The division's recommendations are as follows:

1. Utah Code Section 59-12-103(1)(k) imposes
   sales or use tax on rentals or leases of tangible personal property. XXXXX's rental
   of a computer terminal and software is taxable.

2. A separate charge to receive information or
   data via a terminal is not a taxable service. If non-taxable services are
   separately billed from taxable services or rentals, the non-taxable amount is exempt.
   Since XXXXX does not distinguish in its billings between hardware, software or
   information services, the total amount is taxable.

3. The difference in the treatment for XXXXX
   and XXXXX is that XXXXX furnishes the terminals without rental charge and XXXXX
   rents the equipment and software.

Based
upon the facts presented in your letter, we are in agreement with the Auditing
Division's recommendations. Obviously,
if there are deviations from these facts, this opinion may be negated.

If
you do not agree with this determination, you may appeal to the Tax Commission
for a formal hearing. The results of
that hearing would constitute a declaratory judgment and be appealable to the
Utah State Supreme Court. A Notice of
Appeal Rights and a copy of the Utah Taxpayer's Bill of Rights are attached.

For
the Commission,

Joe
B. Pacheco

Commissioner

Utah
State Tax Commission

160
East Third South

Salt
Lake City, UT 84134

Attn:
Mr. Joe Pacheco

RE:XXXXX

Dear
Mr. Pacheco:

It
has recently come to our attention that the Utah Tax Commission has issued an
advisory opinion to XXXXX (XXXXX) stating that XXXXX, providing information to
its customers, in a way not unlike XXXXX, would be exempt from charging Utah
Sales Tax, but would be liable for Use Tax based on the cost of equipment in
use in Utah by its customers.

XXXXX
provides numerous forms of financial information and data to customers
nationwide, including Utah. Its customers are mostly banks, brokerage
organizations and other financial institutions. The information is received by
customers from its central mainframe computers in New York by way of electronic
impulses transferred interstate over telephone lines. The customer receives the
impulses on special equipment that is "leased". The equipment generally consists of a
controller which receives the impulses and is attached to the telephone lines,
a keyboard which is used to access the database by entering certain commands
and a monitor on which the information appears or is displayed. This equipment
can be used only for receiving the information, it has no other function or
use.

The
XXXXX Agreement with its customers refers to "lessor" (XXXXX) and
lessee (customer) and states that XXXXX will provide to the lessee the equipment
and services described and enumerated (the information and XXXXX software
etc.)XXXXX's invoice labels the charge "Terminal Rental" and adds
Utah sales tax to the rental. The invoice does not distinguish between
hardware, software or information services.

Based
on the above, kindly determine the tax liability of the monthly XXXXX charges.

Should
additional information be needed, please contact me at the address above.

Very
truly yours,

XXXXX

for
XXXXX