The Rhode Island Division of Taxation recently released guidance regarding the taxability of website authentication services (R.I. Ruling Request No. 2011-01 (Div. of Taxation Mar. 4, 2011)). The taxpayer provided companies with authentication services for those wishing to perform secure electronic commerce and communications over the Internet. One way of doing this is by issuing a digital certificate, which is used to facilitate secure transmissions between the Taxpayer's customers and those looking to conduct business with those customers over the Internet. The taxpayer did not transfer any other items to their customers, tangible or otherwise.
While Rhode Island does not specifically address in its statutes how to tax digital goods, the Rhode Island Streamlined Sales Tax Section 328 Taxability Matrix indicates that digital goods are generally not subject to sales tax. In addition, the digital certificates provided by the taxpayer to their customers did not qualify as computer software because they did not provide a set of coded instructions designed to perform a task. Even if the digital certificates could be classified as computer software, prewritten computer software transferred electronically is specifically listed as exempt in Rhode Island (R.I. Code R. SU 09-25). Since the digital certificates did not qualify as tangible personal property and were transferred to the end user over the Internet, they were exempt from tax.
The authentication services were also not subject to sales tax because Rhode Island only imposes tax on specifically enumerated services (R.I. Gen. Laws sec. 44-18-7). While certain telecommunications services are subject to tax, telecommunications services do not include "data processing or information services that allow data to be generated, acquired, stored, processed, or retrieved and delivered by electronic transmission." (R.I. Gen. Laws sec. 44-18-7.1(y)(G)(1)). The Division of Taxation has also stated in other guidance that a company that provides reports of processed data is providing a non-taxable service rather than selling tangible personal property (because customers were really paying for the service, not the tangible reports). For these reasons, the taxpayer's authentication services were not subject to Rhode Island sales tax.