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Arizona: Software Licenses Determined to Be Personal Property Rentals

By Kathryn Pittman and Andrew Appleby

The Arizona Department of Revenue determined that a taxpayer providing online backup and restor

July 25, 2013

By Kathryn Pittman and Andrew Appleby

The Arizona Department of Revenue determined that a taxpayer providing online backup and restoration services was subject to Arizona’s transaction privilege tax (TPT) after concluding that the receipts from such services were taxable as rentals of prewritten software. The taxpayer provided services that automatically backed up and restored files. As a conduit for the backup service, the taxpayer provided a software “agent” that customers installed on their computers to facilitate backups. The service agreement included a software license for the “agent.” Based on the foregoing facts, the Department determined that the taxpayer’s services included receipts for software. Software is considered tangible personal property for purposes of the TPT, and thus receipts therefrom are subject to the TPT. The Department further determined that the transactions fell within the personal property rental classification, as opposed to the retail classification, because customers had limited duration of access to the software. The Department did not undertake a “true object” analysis to examine whether or not the software conduit was de minimis compared to the overall backup service. Ariz. Priv. Ltr. Rul. No. LR 13-002 (Mar. 25, 2013).

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