Ohio Sales and Use Tax: Mixed service sales, including custom software and bank-purchased automated services, require further consideration of the buyer’s true purpose. | Buckingham, Doolittle & Burroughs, LLC

The Ohio Supreme Court recently considered whether certain “account processing services” purchased by Cincinnati Federal Savings & Loan Co. were subject to Ohio sales/use tax. The services involved the use of software to automate the maintenance of the bank’s accounting and financial records on an ongoing, real-time basis. The Court held that the services included non-taxable custom software and the Tax Appeals Board did not consider the true purpose of the service. Since services often involve many aspects, especially with today’s technology, it is imperative that service providers analyze what the buyer is primarily looking for, i.e. the real object. “[A] the transaction is taxable only when the true object of the consumer is to obtain the work carried out by computer systems – ADP or EIS – rather than to obtain personal and professional services which are coupled with the work which is carried out by computer systems”. Cincinnati Federal Savings & Loan Co. v. McClain, Slip Opinion No. 2022-Ohio-725 (Ohio S. Ct. Mar. 15, 2022), ¶24.

Therefore, the Court remanded the case to the Board of Tax Appeals to determine whether the true subject matter of Cincinnati Federal was custom software or taxable automatic data processing (“ADP”) or electronic information services (“EIS “). To see Cincinnati Federal Savings & Loan Co. v. McClain, Slip Opinion No. 2022-Ohio-725 (Ohio S. Ct. Mar. 15, 2022); RC 5739.01(B)(3)(e) and RC 5739.01(Y)(2). Where there is a “mixed transaction” that involves the purchase of taxable (ADP and EIS) and non-taxable (custom software) items, the “real purpose test” must be applied to determine the taxability of each charge. The Commissioner of Taxes asserted that the costs at issue related to taxable ADP and EIS which required the utilize of the software, but were not direct purchases of the software itself. However, the record showed that the service provider made modifications to the pre-written software based on Cincinnati Federal’s specific needs while also including certain aspects that could qualify as ADP and EIS.

The Court rejected Cincinnati Federal’s claim that the automated services it purchased constituted accounting services. Personal and professional services, including accounting services, are non-taxable and excluded from the definitions of ADP and EIS. Therefore, if she had only purchased accounting services, Cincinnati Federal’s purchases would not have been subject to Ohio sales/use tax.

Depending on the final ruling in this case, companies may be eligible for refunds of tax paid on purchases of custom software and automated business solutions, even if only slight modifications were made to the pre-written software.

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