What is a platform? The state and local tax answer

Editor: Mary Van Leuven, J.D., LL.M.

The word “platform” can mean many things. This item discusses its uses as a “computer or hardware device and/or associated operating system, or a virtual environment, on which software can be installed or run” (National Institute of Standards and Technology, Common Platform Enumeration: Naming Specification Version 2.3, Interagency Rep’t No. 7695 (August 2011)) and “an application or website that serves as a base from which a service is provided” (Merriam–Webster.com Dictionary). Those definitions seem simple and straightforward. However, the application of state and local sales or other indirect taxes to a platform, or the service provided by that platform, can be as varied as the meaning of the word “platform” itself.

Classifying platform access beyond SaaS

A company typically invests substantial money to develop the software that operates a platform. As such, the first thought is that the sale of access to a company’s platform or the service provided by that platform will be classified as software as a service (SaaS) when determining which state or local taxes will apply. While SaaS might be the correct tax classification to use when deciding whether state or local taxes should be collected on revenue from the sale of access to the platform, that conclusion requires performing a more detailed analysis of the platform’s use or functionality.

If a customer does not have access to manage or use the software but, rather, the seller oversees and operates the software, SaaS is likely not the correct tax classification. Other state and local tax classifications to consider are data processing or information services, telecommunications services, or digital products. States often look past how the service is provided (i.e., via software), to what the service is or does to conclude whether the service is taxable in the state and, if so, which state or local taxes apply.

Platform service as data processing

The Texas Comptroller of Public Accounts has concluded that SaaS “constitutes a software application delivery model where a vendor develops a web–native software application and hosts and operates (either independently or through a third–party) the application for use by its customers over the internet,” and is taxable as a data processing service (State Tax Automated Research (STAR) Document No. 202402014H (Feb. 13, 2024)). Further, “data processing service” includes “word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production, and other computerized data and information storage or manipulation” (Tex. Tax Code Ann. §151.0035).

Texas has issued numerous private letter rulings that analyze whether services provided using a platform are subject to Texas sales tax. The comptroller has concluded that services like those offered through a restaurant mobile ordering and payment platform (STAR Document No. 202109055L (Sept. 17, 2021)) and a platform that assists with educational classroom and curriculum management (STAR Document No. 202206014L (June 10, 2022)) are taxable data processing services unless they are sold to an exempt customer.

Since Texas taxes SaaS as a data processing service, exempting 20% of the revenue from the sale (Tex. Tax Code Ann. §151.351), the platform is ultimately taxed the same whether the service is determined to be remotely accessed software or a data processing service. Texas also taxes 80% of the revenue generated from the sale of certain information services, in the same manner as SaaS and a data processing service. The importance of getting the tax service classification correct carries more risk in a state that taxes SaaS but not information or data processing services or vice versa, because an erroneous taxability determination could result in over– or undertaxing a customer.

Platform services as information service

New Jersey is an example of a state with added complexity surrounding a platform’s tax classification. In New Jersey, SaaS is not subject to sales tax, but an information service is taxable (N.J. Division of Taxation Technical Bulletin No. TB–72 (July 3, 2013)). An information service is defined as “the furnishing of information of any kind, which has been collected, compiled, or analyzed by the seller, and provided through any means or method, other than personal or individual information which is not incorporated into reports furnished to other people” (N.J. Rev. Stat. §54:32B–2(yy)).

Examination of a platform’s taxability in New Jersey could lead to concluding that the service performed by the platform is an information service, and the service might still not be taxable if that information meets the personal or individual information exclusion criteria. Multiple fact–specific decisions affect the fine line between what service a platform is providing and whether that service is taxable or nontaxable.

Platform service as telecommunications

The appropriate tax treatment of platform sales may change over time. Companies often roll out a platform with basic functionality to perform for a specific purpose and then add new features or functions to the platform services offered. The company focus is on increasing sales and customer demand. The company might not consider how subsequent modifications to the platform might affect state or local tax collection responsibilities.

For example, a platform used to schedule customer appointments and share data with the customer can be enhanced to send appointment reminders and other messages and to provide videoconferencing capabilities. Suddenly, the platform is providing telecommunications services. Will the subscription charge for multiple services/features be treated as a bundle? Will a state analyze the true object or primary purpose of the platform service and find some services are de minimis or not part of the bundle? Could the addition of services affect the taxability of the entire platform subscription charge, causing the service to be classified as a telecommunications service that would be taxable in all states, either under the sales tax, a state or local tax in lieu of sales tax, or a tax in addition to sales tax? The conclusion that a platform is primarily providing telecommunications services or providing telecommunications services as part of a bundle can substantially increase a company’s state or local tax compliance obligations.

In Florida, a service that is otherwise nontaxable or subject to sales tax could become subject to the communications services tax with the addition of certain features. In New York, a service subject to sales tax could become subject to sales tax and a gross receipts tax. Tax departments need to review the platform and related service offerings when the company first offers the service for sale and with every modification that occurs. The state and local tax application can change as the services offered evolve. The modification to offer additional features might be minimal, but the state and local tax impact could be significant.

Platform service as a digital product

A complete platform service taxability review also requires considering whether the platform could be classified as a digital product in any state. The Streamlined Sales and Use Tax Agreement (SSUTA) definition of “specified digital products” generally includes digital audio–visual works, digital audio works, and digital books (Streamlined Sales and Use Tax Agreement, Article III, Section 332 (Adopted Nov. 12, 2002, and amended through Dec. 20, 2024)). Louisiana, a non–SSUTA state, added the sale or lease of digital products to the sales tax base effective Jan. 1, 2025 (Act 10). Louisiana enacted a “digital products” definition that includes digital applications and games, and digital periodicals and discussion forums, in addition to those digital products set forth in the SSUTA (La. Rev. Stat. Ann. §47:301(31)). Enhanced functionality, especially if available through an app, can move platform services toward being bundled with digital products in states with broad digital product definitions.

Improperly determining a platform’s taxable or nontaxable status is not the only error that can arise if the platform is classified incorrectly. The bundling and sourcing rules can differ for the platform service, depending on the tax classification. The federal Mobile Telecommunications Sourcing Act, P.L. 106–252, will govern the bundling (or unbundling) and sourcing of wireless telecommunications service, while state laws will generally control the sourcing and bundling rules for other service or product types. For this reason, an inaccurately classified platform service could have the wrong city or state tax laws, rules, and rates applied.

Ensuring proper application of state or local tax

The common state and local taxability answer “it depends” is more applicable than ever when asked whether a platform, or the service provided by the platform, is subject to state and local tax. One fact can change whether a platform is considered SaaS, a data processing or information service, telecommunications service, a digital product, or something else. Further, that platform might be classified differently from state to state. Ensuring state or local tax is properly applied to a platform requires multiple steps: Check: If a platform does not meet the definition of one taxable service, could the platform be classified as a different taxable service? Double check: If the platform does meet the definition of a taxable service, is there otherwise an exemption or exclusion for the type of data or information provided? And, as platforms are enhanced, check again: Could the addition of platform features create a bundled service or completely change the tax service classification?

Editor Notes

Mary Van Leuven, J.D., LL.M., is a director, Washington National Tax, at KPMG LLP in Washington, D.C.

For additional information about these items, contact Van Leuven at mvanleuven@kpmg.com.

Contributors are members of or associated with KPMG LLP.

The information in these articles is not intended to be “written advice concerning one or more federal tax matters” subject to the requirements of Section 10.37(a)(2) of Treasury Department Circular 230. The information contained in these articles is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. The articles represent the views of the authors only and do not necessarily represent the views or professional advice of KPMG LLP.