Utah Issues Ruling Addressing Taxability of Online Banking and Related Services
In a recent ruling, the Utah State Tax Commission determined that the sale of online banking services to financial institutions was a taxable sale of tangible personal property.
By Jeff Glickman, SALT partner
On Jan. 13, 2016, the Utah State Tax Commission (the “Commission”) released Private Letter Ruling No. 15-005 (the “Ruling”), in which it explained the sales tax treatment of a taxpayer’s provision of online banking and other services to financial institutions which are ultimately used by account holders. This Ruling addresses a difficult sales tax issue: how does one distinguish a transaction over the Internet as involving a sale of prewritten software (e.g., SaaS or electronically downloaded software) versus some other type of service (e.g., data processing or information service)?
Under the facts in the Ruling, the taxpayer provides several service offerings to financial institutions: 
- Online banking – this provides access to accounts through a customized webpage, where the account holder can view balances, statements and transactions.
- Finance and budget tool – this is an add-on service to online banking and will categorize the account holder’s spending, create budgets and allow the account holder to monitor spending and saving activities.
- Online bill payment – this is another add-on service to online banking and allows account holders to send payments to any company or person in the U.S. Payments are processed by a third party chosen by the financial institution.
- Mobile banking – this is the final add-on service to online banking and allows account holders to access accounts and receive online banking services through cell phones, tablets and other mobile devices via a mobile web page.
- Mobile banking application – this can be downloaded for free by the account holder, but the financial institution is charged by the taxpayer for offering this option.
The taxpayer argued that online banking, online bill payment and mobile banking should not be taxable since those services should be considered non-taxable data processing and information services.  Those services are defined as “data acquired, generated, processed, retrieved, or stored and delivered electronically to the purchaser, in which the purchaser’s primary purpose is to obtain the processed data or information.”  In support, the taxpayer noted that even though its proprietary software platform is used to carry out the services, there is no license/transfer of the software, there is no specific charge to the financial institution for use of the platform, the financial institutions or account holders cannot control or access the platform and the taxpayer did transfer constructive possession of its platform to the financial institutions or account holders.
However, the Ruling concluded that all of the service offerings are taxable if the customer (i.e., the financial institution) is located in Utah. Under Utah laws, a “sale” includes any transaction under which any right to use tangible personal property is granted, and “tangible personal property” includes prewritten computer software, regardless of the manner in which it is transferred.  Specifically, the Commission determined that the “essence of the transaction” between the taxpayer and the financial institutions is to provide the financial institutions with use of the taxpayer’s application software.  It reasoned that the financial institutions used the taxpayer’s software in order to provide the online banking services to account holders, and such use required coordination between the financial institutions’ and the taxpayer’s hardware and software.
The SALT group at Aprio is experienced with these complex sales tax issues related to software, electronic services and SaaS, and we are available to assist you in reviewing your transactions to identify the proper sales tax treatment. We constantly strive to keep our clients advised of important issues and developments in state and local taxes in order to help them address their specific tax situations. We will continue to monitor these and other significant SALT developments and include them in future issues of the Aprio SALT Newsletter.
Contact Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at firstname.lastname@example.org for more information.
This article was featured in the February 2016 SALT Newsletter. To view the newsletter, click here.
 The financial institutions pay for these services but they are ultimately used by the institution’s account holders.
 The taxpayer conceded that the finance and budget tool and the mobile banking application were taxable.
 Utah Code Ann. §59-12-102(125(c)).
 Utah Code Ann. §59-12-102(109(b)) and §59-12-102(124).
 The “essence of the transaction” test is similar to the “true object of the transaction” test that states often use to help identify if a transaction is treated as the sale of tangible personal property or a service. We addressed the “true object” test in a prior newsletter and noted that it is a subjective test and that another state could reach a different conclusion using the same facts.
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.