We purchased software from a foreign vendor and also pay an annual sub for support/updates (but this is not required). We access the software from a U.S.-based server and the support is provided remotely. Is this considered U.S.-sourced?


Payment withholding and reporting on software is a complex area. The question regarding payment for software generally is whether it is leased, licensed for royalty or purchased. We’ll leave out royalty, as from your description, it does not apply here.

Generally if you purchase “packaged” software which you can use in perpetuity (e.g. Microsoft Excel), that is a purchase of merchandise and not reportable.  If your use of the software is allowed by subscription (periodic payment), then it is classified as a lease; a lease payment sourced where it is used. You are using it in the U.S., so lease/rental/subscription payment to a Canadian vendor is reportable on 1042-S and withholdable at 30% unless they gave you the appropriate form claiming treaty exemption (which for Canada, would be zero withholding).

Now you make a few points to further complicate this. You claim that you may use the software with no further payment, as though it is a purchase. But you say you have some kind of ongoing subscription relationship with the software supplier for support and updates, which are provided remotely from Canada. It might be that those services are non-U.S. source and not reportable. Meanwhile, the server the software runs on is in the U.S.  

Because the support is connected to the software running on a U.S. server, we are not certain whether the support would be considered non-U.S. source income. The specific details of the arrangement, and the billing (are these elements separately enumerated?), are very important here. Taking each of the elements in isolation, is sounds as though you do not have a reporting requirement. But we are not certain. We recommend that you contact your tax attorney, or tax consultants such as Cokala.com.

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