Information Release

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ST 1999-04 - On-line Services and Internet Access - January, 1999

This Information Release is intended to enunciate the application of Ohio sales and use tax to the provision of Internet Access. It is not being issued as a result of any change in Ohio sales and use tax law nor does it reflect any change in the application of the law by this Department. Rather, it is being issued to review the existing state of sales and use tax law in this area.

Section 5739.01(B)(3)(e) of the Ohio Revised Code provides:

"(B) 'Sale' and 'selling' include all of the following transactions for a consideration in any manner, whether absolutely or conditionally, whether for a price or rental, in money or by exchange, and by any means whatsoever:

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(3) All transactions by which:

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(e) Automatic data processing, computer services, or electronic information services are or are to be provided for use in business when the true object of the transaction is the receipt by the consumer of automatic data processing, computer services, or electronic information services rather than the receipt of personal or professional services to which automatic data processing, computer services, or electronic information services are incidental or supplemental. Notwithstanding any other provision of this chapter, such transactions that occur between members of an affiliated group are not sales. An affiliated group means two or more persons related in such a way that one person owns or controls the business operation of another member of the group. In the case of corporations with stock, one corporation owns or controls another if it owns more than fifty per cent of the other corporation's common stock with voting rights." (Emphasis added.)

Section 5739.01(Y)(1)(c) of the Revised Code provides:

"'Electronic information services' means providing access to computer equipment by means of telecommunications equipment for the purpose of either of the following:

(i) Examining or acquiring data stored in or accessible to the computer equipment;

(ii) Placing data into the computer equipment to be retrieved by designated recipients with access to the computer equipment."

Internet Access Providers (IAPs) provide customers with access, by use of telecommunications equipment, to their computer equipment in order to be connected to the Internet. On-line Service Providers (OSPs) provide Internet access as well as access to certain proprietary services provided by the OSP. In each case, the IAPs and OSPs grant customers access to computer equipment, by means of telecommunications equipment, so the customers can examine or acquire (download) information that is either stored in the provider's computer equipment or made available through the provider's computer equipment from the Internet. Therefore, to the extent that an IAP or OSP is providing its service to a consumer for the consumer's use in business, the IAP or OSP is providing an electronic information service that is subject to Ohio sales and use tax.

Ohio-based providers of electronic information services should be licensed as service vendors. Out-of-state providers should obtain a seller's use tax account. Applications for service vendor's licenses, seller's use tax accounts and consumer's use tax accounts are available from the Department of Taxation, Sales and Use Tax Division or any district office of the Department of Taxation.

Pursuant to section 5739.033(F) of the Revised Code, an electronic information service sale, " . . . is conclusively determined to be consummated at the location of the consumer where the service is performed or received." The tax rate that should be charged is the rate in effect in the county where the consumer is located and where the service is received. Generally, the address of the consumer adequately establishes the location where the service is received.

It can be difficult for an IAP or OSP to determine whether a particular customer intends to use the electronic information service for business purposes or personal purposes. IAPs and OSPs should ask customers whether the service is being purchased for business use or personal use at the time the customer signs up for the service. Unless it is unreasonable on its face, the service provider may rely on the representation of the consumer in determining whether the account is taxable or exempt.

Pursuant to section 5739.071(A) of the Revised Code, providers of electronic information services may seek a refund of twenty-five percent of any Ohio sales or use tax paid to a vendor for purchases of:

" . . . computers, computer peripherals, software, telecommunications equipment and similar tangible personal property, primarily used to acquire, process or store information for use by business customers or to transmit or disseminate such information to such customers, the services of installing or repairing such property, and agreements to repair and maintain such property."

Pursuant to section 5739.071(B) of the Revised Code, if the electronic information service provider is the holder of a direct payment permit, tax may be accrued and paid on seventy-five percent of the price of qualified equipment or services. In the case where a provider of electronic information service has purchased tangible personal property which qualifies for the twenty-five percent refund in section 5739.071 of the Revised Code and no Ohio tax was collected by the vendor, the provider should accrue and pay use tax on seventy-five percent of the purchase price of the tangible personal property on a consumer's use tax account.

Federal legislation known as the Internet Tax Freedom Act, effective October 21, 1998 imposed a three-year moratorium on State and local taxes on Internet access and on-line services. Specifically excluded from the moratorium are taxes that were in effect prior to the effective date of the Federal statute and generally enforced. Ohio's inclusion of electronic information services in the definition of a sale was enacted in 1993, and the same services would have been considered automatic data processing under the law that existed prior to that date. The application of sales and use taxes to these services has been generally enforced. Therefore, Ohio's tax on Internet access and on-line services is not subject to the Federal moratorium.

If you have any questions regarding this matter, you should call us at 1-888-405-4039.

Phone: 1-800-750-0750