BEFORE THE UTAH STATE TAX COMMISSION
PETITIONER, ) FINDINGS OF FACT,
) CONCLUSIONS OF LAW,
Petitioner, ) AND FINAL DECISION
v. ) Appeal No. 02-0441
) Account No. #####
AUDITING DIVISION OF )
THE UTAH STATE TAX ) Tax Type: Sales/Use
) Judge: Phan
Palmer DePaulis, Commissioner
Jane Phan, Administrative Law Judge
For Petitioner: PETITIONER REP 1, Businesses Manger, COMPANY A
PETITIONER REP 2
For Respondent: Susan Barnum, Assistant Attorney General
Scott Smith, Assistant Director, Auditing
Anna Anderson, Manager, Sales/Use Tax
STATEMENT OF THE CASE
This matter came before the Utah State Tax Commission for a Formal Hearing on March 31, 2003. Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:
FINDINGS OF FACT
1. Petitioner is appealing a portion of an audit deficiency of additional sales and use tax assessed for the Audit Period of July 1, 1998 through June 30, 2001. The Statutory Notice from the audit was issued on January 22, 2002.
2. The portion of the audit at issue is related to Petitioner's acquisition of computer software and purchase of ongoing support and maintenance pursuant to a Software License, Maintenance & Support Agreement ("Software Agreement"), that Petitioner entered into on March 26, 1998, with COMPANY A ("COMPANY A"). Petitioner paid no sales or use tax on the purchases outlined in the Software Agreement.
3. Petitioner operates a television station in Utah. The software acquired by Petitioner runs the television programming and commercials of Petitioner's station as well as performs billing functions.
4. COMPANY A was a STATE A corporation that was in the business of creating and providing computer software and computer software maintenance services. Pursuant to the terms of the Software Agreement, COMPANY A would install and license to Petitioner for Petitioner's use certain computer software for the amount of $$$$$. The Software Agreement at Schedule A referred to this amount as the "Setup & Certification Fee and Non-Refundable Third Party License Fee." Schedule A of the agreement also indicated that as part of the setup and certification services there would be five days for technical installation or certification and ten days for installation and training or set up. The schedule indicated that "additional days are expected." The schedule goes on to state, "Any additional days will be discussed with CLIENT and as incurred will be billed at $$$$$ each technical and $$$$$ each installation/training, plus expenses."
5. In addition to the setup, certification and license of the software, the Software Agreement provided for ongoing software maintenance and support for an additional monthly fee of $$$$$ per month for the first year, $$$$$ per month for the second year and increasing incrementally over a period of five years.
6. The software programs Petitioner acquired pursuant to the terms of the agreement were Stars II +Sales Traffic and Receivables System, Stars II + Inventory and Revenue Explorer, Sybase SQL Anywhere, MCAS 2-Way Automation Interface. None of these programs were written specifically for Petitioner as a single user. These programs were developed to be marketed to television stations in general and, although Petitioner's representatives state that they were one of the first customers for these programs, there were clearly other customers for these products around the same time as Petitioner's acquisition and the products continued to be marketed to other customers.
7. Petitioner provided evidence at the hearing that the computer software programs acquired by Petitioner were modified or adapted substantially by COMPANY A to fit Petitioner's specific needs. So although, the core programs were widely marketed to a broad number of customers, there was customization specifically for Petitioner. The evidence indicates it took much longer than originally anticipated by the parties to install the software and customize it to meet the specific needs of Petitioner.
8. However, the charges for modification and adaption were not separately stated and identified in the Software Agreement or its schedules. There is no breakout of which portion of the $$$$$ was for the modification and adaption of the core software to Petitioner's specific needs. As noted above, Schedule A of the Software Agreement did indicate that some of the initial fee was for setup and certification, but it does not indicate how much of this is for the core software and how much would be for the modification and adaption. Concerning the monthly maintenance and support fee, a letter dated January 3, 2002, from COMPANY A's Vice President, NAME, addressed to PETITIONER REP 1, indicates that the monthly fee, "can be allocated as 10% for License Fee, 50% for on-call Support Services, and 40% for Software Maintenance & Updates." This break down does not provide the information as to what portion of the support services or software maintenance and updates relates to the canned or core programs and what portion relates to the modifications and adaptions.
1. 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 . . .(g) services for repairs or renovation so tangible personal property or services to install tangible personal property in connection with other tangible personal property . . . (l) tangible personal property stored, used or consumed in this state . . . (Utah Code Ann. '59-12-103(1).)
2. "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).)
3. "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).)
4. 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 R865-19S-92(B).)
5. Charges for services to modify or adapt canned computer software or prewritten computer software to a purchaser's needs or equipment are not taxable if the charges are separately stated and identified. Utah Admin. (Rule R865-19S-92(D).)
6. 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).)
CONCLUSIONS OF LAW
1. Pursuant to the Software Agreement, Petitioner purchased 'canned computer software' from COMPANY A which is subject to sales tax pursuant to Utah Code Ann. Sec. 59-12-103 and Utah Admin. Rule R865-19S-92.
2. The 'canned computer software,' was modified and adapted to some extent to meet Petitioner's specific needs and equipment. However, the charges for the modification and adaption were not separately stated or identified. Had they been, they would not be subject to the sales tax. See Utah Admin. Rule R865-19S-92(D). In the facts in the matter at hand, the charges for the adaption and modification were not separately stated or identified. Therefore, the total amount is subject to the tax.
3. The monthly maintenance and support fee is also taxable pursuant to Utah Code Ann. Section 59-12-103(1)(g) and Utah Admin. Rule R865-19S-92(B).
DECISION AND ORDER
Based upon the foregoing, the Tax Commission sustains the audit deficiency of additional sales and use tax and interest accrued thereon. It is so ordered.
DATED this 1ST day of May , 2003.
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 1ST day of May , 2003.
Pam Hendrickson R. Bruce Johnson
Commission Chair Commissioner
Palmer DePaulis Marc B. Johnson