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Custom Business Software Services May Be Subject to Sales Tax

In the case of Cincinnati Fed. S & L. Co. v. McClain, 2022-Ohio-725, the Supreme Court of Ohio held that R.C. 5739.01(Y)(2)(e) does not categorically exempt purchases of professional services for designing custom business software from a sales tax.

Here, the taxpayer argued that the purchase of computer-related services, which involved the use of custom software, was nontaxable because R.C. 5739.01(Y)(2)(e) exempts the purchase of professional services related to designing custom software for businesses from a sales tax. The Court disagreed.

In concluding that R.C. 5739.01(Y)(2)(e) was not a tax exemption, the Court explained that R.C. 5739.01(Y)(2)(e) simply states that professional services related to designing custom software for businesses are not included in the definition of other computer-related services, which are subject to a sales tax. Although the purchase of software customization services by itself is not taxable, the entire transaction may be taxable if such services are bundled with taxable computer-related services. To determine whether such “bundled transactions” are taxable, the Court explained that the Board of Tax Appeals (“BTA”) must determine the true object of the transaction. Because the transaction at issue was a “bundled transaction,” the Court remanded the case to the BTA to determine the true object of the transaction.

To read this case, click here.

Authors: Matthew John Markling and the McGown & Markling Team.

Note: This blog entry does not constitute – nor does it contain – legal advice. Legal jurisprudence is like the always-changing Midwestern weather. As a result, this single blog entry cannot substitute for consultation with a McGown & Markling attorney. If legal advice is needed with respect to a specific factual situation, please feel free to contact a McGown & Markling attorney.

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