Sale of DNA Testing with Access to Online Reports Deemed as Taxable Software in Rhode Island

By: Jeff Glickman, SALT Partner

At a glance:

• The main takeaway: Asmost services nowadays include online access, distinguishing between a taxable software license and a nontaxable service that includes the incidental use of software can be challenging. A Rhode Island ruling concluded that a taxpayer’s DNA testing and report subscription is taxable vendor-hosted software.
• Assess the impact: Rhode Island’s ruling draws a difficult line on the sales tax treatment between a service that includes some type of online access via software and a true software license transaction.
• Take the next step: Aprio’s State and Local Tax (SALT) team can help your business understand the tax treatments of your services involving online access to software and the nuanced interpretations among the states.

Schedule a free consultation today to learn more!

The full story

Currently, over 20 states tax software that is hosted by a vendor and remotely accessed by a user, often referred to as software as a service (SaaS). However, it is not always clear when a transaction should be treated as SaaS or some other type of service. While many services are now provided online or include online access, and thus involve some use of software, it should not necessarily result in all of those services being treated as taxable software.

For example, Tennessee imposes sales tax on the use of computer software that includes “the access and use of software that remains in the possession of the dealer who provides the software or in the possession of a third party on behalf of such dealer.”[1] That rule also states that the imposition of sales tax on the use of computer software shall not:

[B]e construed to impose a tax on any services that are not currently subject to tax under this chapter, such as, but not limited to, information or data processing services, including the capability of the customer to analyze such information or data provided by the dealer; payment or transaction processing services; payroll processing services; billing and collection services; internet access; the storage of data, digital codes, or computer software; or the service of converting, managing, and distributing digital products.[2]

This raises the issue of how to determine if a transaction should be treated as a taxable software license or the sale of a nontaxable service that involves software. To the extent that states have provided guidance on this issue, it is generally issued in the form of a letter ruling or administrative decision that is applied to a particular set of facts. A recent Rhode Island Division of Taxation ruling addressed this issue.[3]

A closer look at the taxpayer’s DNA testing services

The Taxpayer is a company based outside of Rhode Island and is an online provider of ancestral and health history reports to individual customers. The Taxpayer operates a distribution center and laboratory outside of Rhode Island, and reports are generated from the company’s analysis of its customers’ DNA from saliva specimens. Customers collect their own saliva with a kit provided by the Taxpayer and then mail 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 Taxpayer charges its customers for different products including the purchase of one-time regular products, add-on purchases that can vary depending on sales, and recurring subscription products that can last from several months to a year at a time.

Rhode Island sales tax is imposed on retail sales, which include sales of “vendor-hosted prewritten computer software.”[4] “Vendor-hosted prewritten computer software” means “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.”[5]

The ruling on vendor-hosted software explained

Based on these provisions, the ruling concluded that the taxpayer was providing “vendor-hosted prewritten computer software” because the taxpayer sells access to software that allows customers to access ancestral and health history reports online and that a key feature of the product is the taxpayer’s website that allows clients to view this information.

An argument could have been made that what the taxpayer is paying for is the DNA analysis and the accompanying reports, and the fact that those reports are accessible via a website should not transform this service into vendor-hosted software.

The bottom line

This ruling highlights the difficulty of determining where the line should be drawn between a service that includes some type of online access via software and a true software license transaction. The decision by Rhode Island suggests that the state is more inclined to treat a transaction as taxable “vendor-hosted prewritten compute software” even when the “software” piece appears to be mere access to information.

Aprio’s SALT team has experience in the sales tax treatment of transactions involving software and the nuanced interpretations among the states. Our team can assist your business with taxability decisions for your revenue streams so that you remain in compliance with your sales tax obligations and do not incur unexpected liabilities and penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

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[1] Tenn. Code Ann. § 67-6-231(b).

[2] Id.

[3] Rhode Island Ruling Request No. 2025-01 (Jan. 29, 2025).

[4] R.I. Gen. Laws §$ 44-18-8 and 44-18-18.

[5] R.I. Gen. Laws §$ 44-18-7.1(g)(vii).