Laws, Regulations and Annotations


Business Taxes Law Guide—Revision 2024

Sales and Use Tax Annotations

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120.0000 Automatic Data Processing Services and Equipment—Regulation 1502

Annotation 120.1176

(b) Processing Customer-Furnished Information

120.1176 Data Recovery Services. When a computer disk drive loses data due to software issues or physical damage to the drive like fire, water, etc., taxpayer performs various operations designed to retrieve the lost data for the customer. Taxpayer buys DVDs, CDs and refurbished disk drives on a tax-paid basis or tax is accrued at the time of purchase. The taxpayer's charge for this service is generally between $500 and $1,000 and the operations generally fall into five categories:

1. The customer's disk drive is sent to taxpayer who recovers the data and puts it back on the disk drive. The disk drive, along with the restored data, is returned to the customer.

2. The customer sends their damaged and unusable disk drive to the taxpayer. The data is recovered and posted on a website. The broken drive is returned to the customer along with a login code and password that allows the customer to download the data from the website.

3. The customer sends the disk drive to taxpayer who determines that the disk drive is damaged and unusable. The data is recovered and saved on DVD/CD, which is returned to the customer along with the broken drive.

4. The customer sends their damaged and unusable disk drive to the taxpayer. The data is recovered and saved on a refurbished disk drive, which is sent back to the customer. A lump-sum fee with no break out of the refurbished drive is charged to the customer.

5. Same as number 4, but the sales invoice is broken out between the charge for the data recovery service and the disk drive.

In general, data recovery services are not taxable and tangible personal property transferred pursuant to these services is incidental. If the service provider transfers tangible personal property to the customer that is not incidental to the performance of the service, the service provider is the retailer and sales tax applies to the sale of such property. On the other hand, Regulation 1501 provides that the transfer of incidental tangible personal property by the person performing the service is a nontaxable event. In such case, tax applies to the service provider's acquisition of the property used in performing the service.

The first and second scenarios above do not include the transfer of tangible personal property to the customer, other than the return of the customer's own disk drive. If the operations are remedial measures to correct a hardware problem, they are repair operations and regarded as a service.

Remedial measures to correct a software malfunction, such as a corrupted file allocation table that no longer records the location of the customer's data on the storage device, constitute the processing of customer-furnished information, the charge for which is not subject to tax. The creation of a new file allocation table that allows the customer to regain access to the lost data is considered to be summarizing and sorting the customer's existing data and sales tax will not apply to charges for this service, pursuant to Regulation 1502. In addition, since the customer only obtains the data by accessing it and downloading it from the website, there is no sale of tangible personal property, and no tax would apply to the charges for this service.

The remaining three scenarios involve the transfer of tangible personal property in the form of a storage medium that was not furnished by the customer and which contains the customer's restored data. Under the assumption that these scenarios arise from an unrepairable storage device or corrupted data, we regard the data as no longer existing in its original form, and any recovered data constitutes "original information" derived from data furnished by the customer. The true object of the contract is the performance of a data recovery service and the storage medium furnished to the customer is merely incidental to providing the service.

However, the last scenario provides for a separately stated charge for the refurbished disk drive that is transferred to the customer. In this case, the taxpayer is the retailer of the refurbished disk drive and this charge is subject to tax. If taxpayer purchases the disk drives on a tax-paid basis, a tax-paid purchases resold deduction may be taken and the taxpayer is required to hold a seller's permit for these types of transactions. 3/16/07. (2008–1).