Sales & Use
BEFORE THE UTAH STATE TAX COMMISSION
) Appeal No. 00-0257
v. ) Account No. #####
AUDITING DIVISION OF ) Tax Type: Sales & Use
THE UTAH STATE TAX )
COMMISSION, ) Judge: Phan
Jane Phan, Administrative Law Judge
For Petitioner: PETITIONER REP, Tax Director, PETITIONER
For Respondent: Susan Barnum, Assistant Attorney General
Shelly Robinson, Tax Audit Manager
STATEMENT OF THE CASE
This matter came before the Utah State Tax Commission for an Initial Hearing pursuant to the provisions of Utah Code Ann. '59-1-502.5, on August 7, 2000.
Petitioner is appealing additional sales tax of $$$$$ assessed by Respondent following an audit for the period of October 1, 1996 through June 30, 1999. The portion of the assessment appealed pertains to a transaction between Petitioner and COMPANY A. Petitioner licensed to COMPANY A the use of a software program called the PROGRAM, in connection with the sale of what was clearly a custom program developed solely for COMPANY A. In the Master Software License and Service Agreement, Petitioner listed separately the charges for the PROGRAM as well as the training and maintenance of the PROGRAM system, from the charges for the custom portion of the program.
Petitioner explained that the PROGRAM is merely a pre-existing routine which is the very basic base upon which it builds custom software programs. The PROGRAM can be used in any type of software program. Besides the testing program Petitioner produced for COMPANY A, Petitioner has used the PROGRAM in a medical program, an energy usage program and a casualty insurance program. Petitioner explains that it is not even a "basic shell" type program, because a "basic shell" would be like a basic billing program which would be modified to meet each customer's use but would always be a billing program. Petitioner indicates that pursuant to the licensing agreement, COMPANY A may not use the PROGRAM separately from the final custom program.
Petitioner argues that the charges for the PROGRAM are exempt from sales tax pursuant to Utah Administrative Rule 865-19S-92 (A)(2) because it is a program component of the final custom software application which Petitioner built for COMPANY A. Petitioner points out that the rule allows for the use of preexisting routines, utilities or similar program components in developing custom software. In addition Petitioner relies on Tax Commission Advisory Opinion 97-062.
Respondent states that Petitioner teaches intensive training courses on, and has training manuals for, the use of the PROGRAM. During any one training course there may be several of Petitioner's various clients who attend as well as Petitioner's recently hired employees. It is Respondent's position that the PROGRAM is "canned software," and is, therefore, subject to sales tax pursuant to Utah Administrative Rule R865-19S-92 (A) (5). Respondent points out that Petitioner has separate charges for the PROGRAM as well as the maintenance and training related to the PROGRAM. Respondent states that where charges for canned and custom software are stated separately they are given different tax treatment, pointing to Utah Administrative Rule R865-19S-92(D).
There is levied a tax on the purchaser for the amount paid or charged for the following: (a) retail sales of tangible personal property made within the state . . . (Utah Code Ann. '59-12-103(1).)
"Canned computer software" or "prewritten computer software" means a program or set of programs that can be purchased and used without modification and has not been prepared at the special request of the purchaser to meet their particular needs. (Utah Admin. Rule R 865-19S-92 (A)(1).)
"Custom computer software" means a program or set of programs designed and written specifically for a particular user. The program must be customer ordered and can incorporate preexisting routines, utilities or similar program components. The addition of a customer name or account titles or codes will not constitute a custom program. (Utah Admin. Rule R 865-19S-92 (A)(2).)
The sale, rental or lease of canned or prewritten computer software constitutes a sale of tangible personal property and is subject to the sales or use tax regardless of the form in which the software is purchased or transferred. Payments under a license agreement are taxable as a lease or rental of the software package. Charges for software maintenance, consultation in connection with a sale or lease, enhancements or upgrading of canned or prewritten software are taxable. (Utah Admin. Rule R 865-19S-92 (B).)
The sale, rental or lease of custom computer software constitutes a sale of personal services and is exempt from the sales or use tax, regardless of the form in which the software is purchased or transferred. Charges for services such as software maintenance, consultation in connection with a sale or lease, enhancements, or upgrading of custom software are not taxable. (Utah Admin. Rule R 865-19S-92 (C).)
DECISION AND ORDER
After review of the facts as presented by the parties in this matter, the Commission determines that the PROGRAM is canned software and subject to sales tax. Based on the forgoing the audit assessment is sustained.
This decision does not limit a party's right to a Formal Hearing. However, this Decision and Order will become the Final Decision and Order of the Commission unless any party to this case files a written request within thirty (30) days of the date of this decision to proceed to a Formal Hearing. Such a request shall be mailed to the address listed below and must include the Petitioner's name, address, and appeal number:
Utah State Tax Commission
210 North 1950 West
Salt Lake City, Utah 84134
Failure to request a Formal Hearing will preclude any further appeal rights in this matter.
DATED this 20th day of October , 2000.
Administrative Law Judge
BY ORDER OF THE UTAH STATE TAX COMMISSION.
The Commission has reviewed this case and the undersigned concur in this decision.
DATED this 20th day of October , 2000.
Pam Hendrickson R. Bruce Johnson
Commission Chair Commissioner
Palmer DePaulis Marc B. Johnson