Minnesota high court finds that customized software sales tax exempt only if pre-written portion stated separately on invoice
Sales tax exemptions often turn on matters of form over substance. How you bill a client – not what you bill them for – can determine whether you must collect sales tax. A Minnesota software company recently learned that painful lesson after losing a battle in state court over the assessment of back sales taxes.
The company, LumiData, provides sales-tracking software to retailers. According to LumiData, each customer purchases a custom software package tailored to their needs. The Minnesota-based company did not collect sales taxes on dozens of these sales between 2005 and 2008. In 2009, Minnesota’s commissioner of revenue audited LumiData and assessed more than $233,000 in back sales taxes, together with over $65,000 in penalties and interest.
Under Minnesota law, the sale of “prewritten computer software” is subject to sales tax. This excludes software “that is not designed and developed by the author or other creator to the specifications of a specific purchaser.” LumiData argued its software fell within this exclusion. But the commissioner disagreed, that LumiData did not separately state any “customization” charges in its customer invoices, as the law requires. LumiData replied the entire software package was customized and therefore a separate charge should be unnecessary.
Unfortunately, neither Minnesota’s Tax Court nor the state’s Supreme Court agreed with LumiData. In a decision issued on Sept. 10th of this year, the Minnesota Supreme Court unanimously affirmed the findings of the commissioner and the court holding LumiData liable for sales tax on all of its prior software sales. Justice Wilhelmina M. Wright authored the Supreme Court’s opinion. She concluded while LumiData customized its software for each customer, the overall package represented “a combination of prewritten and customized software.” Therefore the burden was on LumiData to state a separate charge for customization in order to receive a sales tax exemption.
Wright said LumiData could not simply declare its entire package was customized and therefore exempt from sales tax. She credited the Tax Court’s finding that LumiData failed to provide any evidence – beyond the self-interested testimony of its own employees – proving its entire fee was related to customization.
Wright also upheld the commissioner’s assessment of penalties against LumiData for failing to pay its sales taxes on time. Normally a taxpayer can avoid such penalties in Minnesota if it relied upon the advice of its accountant. But here, Wright said LumiData failed to even ask its accountant for a formal opinion.
S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.
Sales tax exemptions often turn on matters of form over substance. How you bill a client – not what you bill them for – can determine whether you must collect sales tax. A Minnesota software company recently learned that painful lesson after losing a battle in state court over the assessment of back sales taxes. The company, LumiData, provides sales-tracking software to retailers. According to LumiData, each customer purchases a custom software package tailored to their needs. The Minnesota-based company did not collect sales taxes on dozens of these sales between 2005 and 2008. In 2009, Minnesota’s commissioner of revenue audited LumiData and assessed more than $233,000 in back sales taxes, together with over $65,000 in penalties and interest. Under Minnesota law, the sale of “prewritten computer software” is subject to sales tax. This excludes software “that is not designed and developed by the author or other creator to the specifications of a specific purchaser.” LumiData argued its software fell within this exclusion. But the commissioner disagreed, that LumiData did not separately state any “customization” charges in its customer invoices, as the law requires. LumiData replied the entire software package was customized and therefore a separate charge should be unnecessary. Unfortunately, neither Minnesota’s Tax Court nor the state’s Supreme Court agreed with LumiData. In a decision issued on Sept. 10th of this year, the Minnesota Supreme Court unanimously affirmed the findings of the commissioner and the court holding LumiData liable for sales tax on all of its prior software sales. Justice Wilhelmina M. Wright authored the Supreme Court’s opinion. She concluded while LumiData customized its software for each customer, the overall package represented “a combination of prewritten and customized software.” Therefore the burden was on LumiData to state a separate charge for customization in order to receive a sales tax exemption. Wright said LumiData could not simply declare its entire package was customized and therefore exempt from sales tax. She credited the Tax Court’s finding that LumiData failed to provide any evidence – beyond the self-interested testimony of its own employees – proving its entire fee was related to customization. Wright also upheld the commissioner’s assessment of penalties against LumiData for failing to pay its sales taxes on time. Normally a taxpayer can avoid such penalties in Minnesota if it relied upon the advice of its accountant. But here, Wright said LumiData failed to even ask its accountant for a formal opinion. Sales tax exemptions often turn on matters of form over substance. How you bill a client – not what you bill them for – can determine whether you must collect sales tax. A Minnesota software company recently learned that painful lesson after losing a battle in state court over the assessment of back sales taxes. The company, LumiData, provides sales-tracking software to retailers. According to LumiData, each customer purchases a custom software package tailored to their needs. The Minnesota-based company did not collect sales taxes on dozens of these sales between 2005 and 2008. In 2009, Minnesota’s commissioner of revenue audited LumiData and assessed more than $233,000 in back sales taxes, together with over $65,000 in penalties and interest. Under Minnesota law, the sale of “prewritten computer software” is subject to sales tax. This excludes software “that is not designed and developed by the author or other creator to the specifications of a specific purchaser.” LumiData argued its software fell within this exclusion. But the commissioner disagreed, that LumiData did not separately state any “customization” charges in its customer invoices, as the law requires. LumiData replied the entire software package was customized and therefore a separate charge should be unnecessary. Unfortunately, neither Minnesota’s Tax Court nor the state’s Supreme Court agreed with LumiData. In a decision issued on Sept. 10th of this year, the Minnesota Supreme Court unanimously affirmed the findings of the commissioner and the court holding LumiData liable for sales tax on all of its prior software sales. Justice Wilhelmina M. Wright authored the Supreme Court’s opinion. She concluded while LumiData customized its software for each customer, the overall package represented “a combination of prewritten and customized software.” Therefore the burden was on LumiData to state a separate charge for customization in order to receive a sales tax exemption.
