The PICPA recently raised questions with the Pennsylvania Department of Revenue over its guidance on the sales tax treatment of software, data, and related services. For tax practitioners, DOR's guidance underscores the importance of facts-and-circumstances analysis and signals where compliance risks may arise.
The Pennsylvania Department of Revenue (DOR) recently provided the PICPA with additional insight and guidance into its evolving guidance on the sales tax treatment of software, data, and related services. The clarification – issued in response to questions raised by the PICPA State Taxation Steering Committee and its Sales and Use Tax group, of which I am the chair – highlights how the Department is approaching increasingly complex, technology-driven transactions.
For CPAs and tax practitioners, the guidance underscores the importance of facts-and-circumstances analysis and signals where compliance risks may arise.
Evaluating Services “In Conjunction With” Tangible Personal Property
A central issue addressed by the DOR is when services are considered part of the taxable “purchase price” of tangible personal property – particularly in the context of software and technology transactions.
The Department emphasized that no single factor is determinative. Instead, it applies a holistic review of each transaction, considering:
- Timing of agreements – Whether service agreements are executed at or near the time of the underlying sale may suggest the charges are part of the taxable purchase price.
- Relation to essential function – While relevant, whether a service is necessary for the product to function is not dispositive.
- Post-sale decisions – Charges arising from events occurring after the initial purchase may weigh against inclusion in the taxable purchase price.
- Separate agreements and structure – The existence of distinct contracts and how the transaction is structured remain important considerations.
Ultimately, the Department evaluates whether the charges are tied to the “complete performance of the sale at retail,” applying the broad statutory definitions of “purchase price” and “sale at retail” under Pennsylvania law.
Practitioner takeaway: When determining the taxability of the software-related services it will be critical to document the nature of the service and any direct relationship to software sourced to Pennsylvania. Maintaining acceptable documentation to support details such as the nature of the services, how those services affect the usage of software, and the location of the users will be needed to support tax positions.
“Data” as Tangible Personal Property
The DOR also reaffirmed its position that certain digital products – including “data” – can constitute taxable tangible personal property under Pennsylvania sales and use tax law, as expanded by Act 84 of 2016.
The Department highlighted two common scenarios:
- Precompiled data sets – The sale or subscription-based access to a compiled database (e.g., mailing lists) is treated similarly to the sale of printed materials and is generally taxable.
- User-generated data outputs – When customers use software tools (e.g., filters or search functions) to generate customized data sets, the transaction may be treated as a taxable license to use software.
Practitioner takeaway: Per the Department’s examples, the taxability in Pennsylvania will be determined by the nature of what the purchaser receives and how the purchaser accesses the intended offering. As we move further into an environment where services and digital products become more intertwined, the analysis will become more critical to determine taxability.
Why Guidance Was Issued Informally
The Department cited the need for timeliness and flexibility, noting that stakeholders – including the PICPA – requested more immediate clarity in a rapidly evolving area.
By using online guidance, the DOR can update interpretations more quickly as new business models and fact patterns emerge.
Practitioner takeaway: While helpful, informal guidance may evolve. Practitioners should monitor updates closely and recognize its nonbinding nature.
Interaction with Existing Regulations
Questions were also raised regarding potential conflicts between the DOR’s guidance and existing regulations, particularly 61 Pa. Code Section 60.19. In their responses, the Department acknowledges that 61 Pa. Code Section 60.19 was issued in response to the legislative action that repealed the taxability of computer-related services.
The Department’s position is that:
- Statements of policy, such as 61 Pa. Code Section 60.19, are interpretive and nonbinding, and statutory language ultimately controls the final determination.
- The current guidance does not reclassify services as taxable on their own.
- Instead, services may be taxable only if they:
- Are included in the taxable purchase price, or
- Qualify independently as a taxable retail sale (e.g., repair, alteration, or installation of tangible personal property).
Practitioner takeaway: As IT and computer related services evolve into the next generation, absence of legally binding guidance regarding the taxation of those services have created an environment where it is ever more important to review contracts and other terms to provide proper analysis as it relates to sales and use tax for these services.
Bottom Line
Unlike a number of other states, Pennsylvania has not updated its sales and use tax statutes since 2016 to address the shift to the computer and digital services discussed above. However, within that same time frame the evolution of technology and its applications continue to occur at a rapid pace. The Pennsylvania DOR, in response is adapting its sales tax framework to modern, technology-driven transactions, often relying on interpretation of existing, outdated statutory definitions.
For CPAs and tax practitioners, this means:
- Greater reliance on facts-and-circumstances analysis
- Increased scrutiny of transaction structure and documentation
- Ongoing need to monitor administrative guidance and evolving interpretations.
The PICPA greatly appreciates the Department’s willingness to engage in a constructive and thoughtful discussion on this complicated issue. The PICPA will continue to engage with the Department to seek clarity and advocate for the practical and consistent application of the law as these issues evolve.
Mark Balistrieri, CPA, is director, state and local tax, with Schneider Downs in Pittsburgh and chair of PICPA's Sales and Use Tax Thought Leadership Committee. He can be reached at mbalistrieri@schneiderdowns.com.
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Statements of fact and opinion are the author's responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.
