REQUEST
LETTER
01-027
Response 10/31/01
NAME
ADDRESS
CITY/STATE
Ruling for
Sales and Use Tax Ruling
On behalf of our client
(referred to hereafter as “Taxpayer” or “the Taxpayer”), COMPANY requests a
written ruling regarding the applicability of your state’s sales tax to the
sale of software, software installation, services, consulting services,
content, content services, and hosting services, as described below.
FACTS –
SCIENARIO 1: Content Software and Content Information
Taxpayer, with
offices located in several states and headquartered in STATE, licenses content
software to customers located throughout the United States. Content software is application software
that allows the customer to access a database of information on suppliers and
distributors including product descriptions, pricing, and availability of product. Generally, this information is customized by
the Taxpayer for each customer and licensed separately as a content
database. Typically, the Taxpayer is
contracted by the customer to obtain all the necessary information for the
content database and may include data that it has gathered in a previous
contract with another customer.
Separate invoices are issued to the customer for the content software
and the content database.
The customer can
receive both the software and the content database on disk or as an electronic
download (the software and the content are delivered to the customer on
separate disks, or as separate electronic downloads). On occasion the database is archived by a host provider, which
could be the Taxpayer, and accessed by the customer via the Internet.
The Taxpayer may
install the software for the customer.
These installation services, referred to as consulting services, are
optional and separately invoiced from the information (content) gathering
services. The Taxpayer may also provide
an annual support/maintenance to the customer for the content software and the
content database which includes periodic software updates and telephone
support. These updates may be provided
to the customer either electronically or via disk. The annual support/maintenance agreement is optional and
separately invoiced from charges for the software. However, the charge for the annual support/maintenance agreement
is not separately stated between the software updates and the telephone
support.
While the content
information is provided pursuant to the customer’s request and customized for
the customer’s specific needs, the Taxpayer has the option of selling the same
information to other customers. The
Taxpayer retains all rights in and ownership of the software and the content
database.
QUESTIONS:
Is the content
software that allows the
customer to access the content database subject to sales tax if:
Delivered to your state by disk?
Delivered to your state electronically?
Supplied to a host provider outside your state and accessed by the
customer in your state via the Internet?
Supplied to a host provider within your state and accessed by the
customer in your state via
the Internet?
Supplied to a host provider within your state and accessed by the
customer in another state via the Internet (assume the customer has no nexus in
your state?
Is the content
database subject to sales
tax if:
Delivered to the
customer in your state by disk?
Delivered to your state electronically?
Supplied to a host provider located outside your state and
accessed by the customer in your state via the Internet?
Supplied to a host provider within your state and accessed by the customer in your state via the
Internet?
Supplied to a host provider within your state and accessed by the
customer in another state via the Internet (assume the customer has no nexus in
your state)?
Is the charges for the optional annual support/maintenance agreement related to either the content software or
the content database subject to sales tax if:
Delivered to your state by disk?
Delivered to your state electronically?
Supplied to a host provider outside your state and accessed by the
customer in your state via
the Internet?
Supplied to a host provider within your state and accessed by the
customer in your state via the Internet.
Supplied to a host provider within your state and accessed by the
customer in another state via the Internet (assume the customer has no nexus in
your state)?
Is the optional
consulting charge (i.e.,
the installation charge) related to either the content software or the content
database subject to sales tax if:
The service is performed at the customer’s location in your state
and the benefit to the customer
is received in your state?
The service is performed outside your state, but the benefit to
the customer is received in your state?
If your state
taxes these charges based on where the benefit is received,
how is the
benefit location determined? How should
the Taxpayer handle the sales tax in your state if the customer’s benefit
location cannot be determined? Can the
Taxpayer accept an exemption certificate from the customer for the full amount
of the sale and let the customer determine its locations of benefit and accrue
use tax accordingly?
If the content database is sold to a second customer with or
without modification, would the content then be subject to sales tax in a
different manner than the first customer if it is:
Delivered to your state by disk?
Delivered to your state electronically?
Supplied to a host provider outside your state and accessed by the
customer in your state via the Internet?
Supplied to a host provider within your state and accessed by the
customer in your state via the
Internet?
Supplied to a host provider within your state and accessed by the
customer in another state via the Internet (assume the customer has no nexus in
your state)?
FACTS –
SCENARIO 2: SOFTWARE HOSTING
Taxpayer, with
offices in several states and headquartered in STATE, licenses application
software to customers located throughout the United States. This software does not involve the separate
content database as described in Scenario 1.
Typically, the Taxpayer will perform a detailed analysis of the
customer’s needs, which may require adaptation or modifications to fit the
customer’s specific environment.
During this process, the source code of the software is not changed. The
software is shipped to a third party hosting company that will be paying
commission to the Taxpayer. It is also
possible for the customer to request the Taxpayer to host the software. There are several options to the method of
delivery. The software can be placed on
a disk and shipped by common carrier to the host provider, transferred
electronically to the host provider, or the host provider may already have the
software product and transfer the software electronically to a server dedicated
to the customer. On occasion the
customer has no other presence in your state other than the software license
hosted by the third party provider or the Taxpayer.
QUESTIONS:
Is the software subject to sales tax when it is shipped via disk by common carrier to a third party host located within the
state when the customer has no other presence in your state other than the
licensed software? Does it change the
taxability if the customer or the Taxpayer contracts directly with the hosting
company? Does it change the taxability
if the hosting company is the Taxpayer who sold the software?
Is the software subject to sales tax when it is shipped electronically to the hosting company when the customer
has no other presence in your state other than the licensed software? Does it change the taxability if the
customer or the Taxpayer contracts directly with the hosting company? Does it change the taxability if the hosting
company is the Taxpayer who sold the software?
Is the software subject to sales tax if it is already located at
the host provider location and transferred electronically to a server dedicated to the customer
when the customer has no other presence in your state other than the licensed
software? Does it change the taxability
if the customer or the Taxpayer contracts directly with the hosting company? Does it change the taxability if the hosting
company is the Taxpayer who sold the software?
Is the software subject to sales tax when it is shipped to a
hosting location outside your state, but the customer accesses the software
from its offices or other facilities located in your state and the state where
it is hosted taxes the software? Does it change the taxability if the state
where the software is hosted doesn’t tax the software?
Would the hosting fees for the software be subject to sales
tax? If so, would the hosting be taxed
differently if the hosting was performed during implementation of the software and before the customer
has access to it versus being performed once the software is in production and
the customer has full use and access to it?
FACTS –
SCENARIO 3: Transaction and Subscriber
Fees
Taxpayer, with
offices in several states and headquartered in STATE, licenses application
software to customers located throughout the United States. This software could be either the content
software with the separate content database as described in Scenario 1 or the
Taxpayer’s other suite of software discussed in Scenario 2. Typically, the Taxpayer would perform a
detailed analysis of the customer’s needs, which may require adaptation or modifications
to fit the customer’s specific environment, but the source code would not be
changed. The use of the software can be
obtained in several ways. The customer
could obtain the software by purchasing a perpetual license or by purchasing a
term license, or the customer could be charged fees based on the volume of
transactions while using the software, charged fees based on the dollar amounts
of the transactions while using the software, or the customer could subscribe
to the use of the software without taking possession or having control.
QUESTIONS:
If the software license is provided to a customer at no initial cost, but instead for
future fees based on a per transaction charge or a percentage of the
transaction dollar amount, would these fees be subject to sales tax?
If the software is never sold or licensed to the customer, but
instead is hosted at the
Taxpayer location or by a third party contracted by the Taxpayer and the
customer is allowed to access the software via the Internet for fees based on
the number of transactions or as a percentage of the dollar value of the
transactions, would these transaction fees be subject to sales tax?
If the software is never sold or licensed to the customer, but the
third party hosting company is hired by the customer and the customer is allowed to access the software via the
Internet for fees based on the number of transactions or as a percentage of the
dollar value of the transactions, would these transaction fees be subject to
sales tax?
If the customer buys a perpetual license, would the software be subject to sales tax? Would any optional consulting fees be
subject to sales tax? Would any
optional maintenance fees that include both telephone support and updates be
subject to sales tax? Would separately
stated expenses for travel and meals be subject to sales tax?
If the customer buys a term license, would
the software be subject to sales tax?
Would any optional consulting fees be subject to sales tax? Would any optional maintenance fees that
include both telephone support and updates be subject to sales tax? Would separately invoiced expenses for
travel and meals be subject to sales tax?
FACTS –
SCENARIO 4: Contribution of Software
The Taxpayer on
occasion may contribute the software license to another company in exchange for
equity in the company.
If the software is contributed to a company solely in exchange for stockholder’s
equity in the company and the Taxpayer receives fees based on the volume of
transactions or as a percentage of the dollar value of the transactions, would
these fees be subject to sales tax?
Would the initial contribution of the software constitute a taxable
sale?
If the software is contributed to a company for stockholders
equity in the company and the Taxpayer receives no compensation other than the
equity, would this constitute a taxable sale?
Would any optional installation/consulting
fees or periodic update fees be subject to sales tax if invoiced
separately? Would reimbursed expenses
that are billed to the customer be subject to sales tax?
Ruling Request
We respectfully request a written ruling
concerning the proper application of your state’s sales tax to the above
scenarios. Please address each question
individually and provide supporting citations for your determinations. A Glossary of Terms is attached for your
convenience.
We appreciate
your assistance with this request.
Should you have any questions, please contact me at PHONE.
NAME
GLOSSARY OF TERMS FOR RULING REQUEST
Consulting
Services –optional services
that may be purchased by a customer for the installation and implementation
phases of the software. These services
also include consulting services after the software has been installed and is
being utilized by the customer.
Content
Information – a database
of information necessary for the customer business needs which can be provided
on magnetic media or electronically.
Content
Software – application
software that allows the customer to access a database of information on
suppliers and distributors including product descriptions, pricing and
availability of product.
Host Provider – either a third party company or the
Taxpayer providing server space where the software or content information would
reside allowing the Taxpayer’s customer to access the software or content
information from another remote site.
This can be temporary during the implementation phase of the project or
can be permanently after the software is installed and is being utilized by the
customer.
Licensed
Software – the unmodified
(source code is not changed), object-code version of software in the form of
application programs. These programs
perform business functions, or control or monitor processes. The license is evidenced by a written
agreement signed by the licensor (the Taxpayer) and the customer, it restricts
the customer’s duplication and use of the software, and it prohibits the
customer from licensing, sublicensing, or transferring the software to a third
party. The licensor will provide
another copy at minimal or not charge if the customer loses or damages the
software, and the customer must return or destroy the software at the end of
the license period. In addition, the
licensor will perform a detailed analysis of the customer’s requirements in
selecting the programs. The licensed
products are shipped FOB shipping point with the licensor paying the associated
shipping charges. On occasion, the
customer requests the software to be transferred electronically.
Maintenance – an optional agreement to provide software
updates during a set time period and includes telephone support (with an
estimated value of 10% of the contract price).
This agreement is also called Annual Support.
Perpetual
License – a license for a
customer to use the Taxpayer’s software perpetually. The customer may elect not to renew agreements for consulting
services or periodic updates; however, the customer keeps the software
indefinitely under a perpetual license.
Travel and
Expenses – separately
stated fees to customers for actual travel expenses of the Taxpayer ’s
consultants for airline tickets, transportation costs, meals, hotel, and
miscellaneous costs. These costs are
the actual cost and no mark-up is included.
Term License – a license for a customer to use the
Taxpayer’s software for a specified period of time (e.g., three years). Unless the license agreement is renewed, the
customer must return all copies of the software to the Taxpayer at the
conclusion of the term.
RESPONSE
LETTER
DATE
NAME
ADDRESS
CITY/STATE
RE: Advisory Opinion – Sales and Use Tax
Questions Concerning Access to Databases
Dear NAME:
You have requested information concerning
the application of Utah’s sales and use tax on sales made by your client (the
“Taxpayer”), who is in the business of selling software, software installation,
services, consulting services, content, content services and hosting services,
as described in your letter. Before addressing your specific questions, we
first offer some general observations concerning the taxation of computer
software in Utah.
Utah
Admin. Rule R865-19S-92 (“Rule 92”) (copy enclosed) provides that the sale of
“canned computer software” (prewritten computer software) is taxable, while the
sale of “custom computer software” (programs written specifically for a
particular user) is not. Nevertheless,
canned computer software may be individually modified to a limited extent without
it becoming custom software. As a
general threshold, adding a customer=s
name or other superficial adaptations is not enough to qualify the software as
custom software. Similarly, bundling
several prewritten software components together into a set for a particular
customer does not change the software’s character from Acanned@ to Acustom@ software. To become custom computer software, the
adaptations must be sufficient to change the functional operation of the
software. Whether the final software product
is “canned” or “custom” depends on the circumstances surrounding the
development of each product and the nature of the programs that comprise it.
The content software is not written for a particular
customer and, as such, appears to be canned computer software. More difficult to assess is the content
database because it is compiled to reflect each customer’s informational
needs. Nevertheless, it also appears to
be canned computer software because the data, though customized to provide only
that information requested by the customer, has often been previously prepared
for other customers. While the customer
may request a unique combination of database files, the separate components
comprising the content database program have been prepared to license to
multiple users. Bundling a unique set
of canned components into a package for a particular customer does not convert
them to custom software. It appears, then,
that the content database your client licenses is also canned computer software
and, thus, taxable. Even adding a new
“component” to include on the content database would not change the database
from canned to custom computer software.
The computer software would still be canned, just in another form.
Because
they appear to be canned computer software, both the content software and the
content databases are taxable whether the Taxpayer delivers them to the
customer by disk or electronic means.[1] Utah currently applies its sales and use tax
if the customer receives possession of canned database computer software,
regardless of the means of access. On
the other hand, if a customer goes to an Internet site to view a database
without downloading the content software or content databases on his or her own
computer, then the customer has not received possession of the tangible
personal property; i.e., the canned computer software.[2] Nor does Utah currently impose the sales and
use tax in this latter circumstance under the theory of renting or leasing
tangible personal property. Accordingly,
for electronic transactions, the software must at least temporarily “reside” in
the customer’s computer for the transaction to be the taxable sale of tangible
personal property. Accessing software
at a “host” provider site without downloading the software onto ones computer
is not a taxable transaction.
As for other charges associated with the software,
Subsection (C) of Rule 92 provides that “[c]harges for services such as
software maintenance, consultation in connection with a sale or lease, enhancements,
or upgrading of custom software are not taxable” (emphasis added). However, charges for these services made in
connection to the sale of canned computer software are taxable.
In
addition, the installation of tangible personal property to tangible personal
property is taxable. See Utah Code Ann.
§59-12-103(1)(g). The computer software
licensed by the Taxpayer is tangible personal property. When fees are charged to install that
software to a computer, which is also tangible personal property, in Utah,
those fees are taxable regardless of the location from which the software is
installed. We point out that the
installation service is differentiated from those services deemed nontaxable in
Subsection (D) of Rule 92, which clarifies that services to modify or adapt
canned computer software to a purchaser=s
needs or equipment are not taxable if the charges are separately stated and
identified.
This scenario involves licensing software that requires no
source code changes, but may involve modifications to fit a customer’s specific
environment. As discussed earlier,
adaptations that do not change the functional operation of the software
generally do not transform canned computer software into custom software. Accordingly, the software discussed in this
scenario appears to be canned computer software. We again point out that Subsection (D) of Rule 92 provides that services
to modify or adapt canned computer software to a purchaser=s needs or equipment are not taxable if the charges
are separately stated and identified
The taxability of canned computer software to Taxpayer’s customers is the same as discussed in Scenario 1, whether a customer contracts with the Taxpayer or with the host provider. If canned computer software is downloaded, not to a customer’s computer, but to a server dedicated to the customer, the transaction may still be taxable because the customer is considered to be renting or leasing the server as part of the contract price for the software. Any software delivered to such a server is in possession by the customer and is taxable, if the server is located in Utah. If the server is located outside of Utah, the sale is not taxable. On the other hand, if the server is not dedicated to one particular customer, we consider the server to be in the possession or control of the host provider or the Taxpayer. In this case, the sale of access to the computer software is not taxable, because the customer has not received possession of the software.
Taxes should be collected on the sales of taxable canned
computer software as follows. If the
customer purchases taxable canned computer software from a host provider, the
host provider must collect sales tax on the purchase. In this situation, the host provider may purchase the software
tax-free from the Taxpayer using the resale exemption. On the other hand, should the host provider
sell the customer access to the software without the customer receiving
possession of it, the transaction is nontaxable. In this situation, however, the host provider would be consuming
the canned computer software in providing its nontaxable service. Accordingly, the transaction between the
host provider and the Taxpayer would be taxable, and if the “hosting fee” is
the purchase price paid by the host provider to the Taxpayer for the software,
this amount is subject to sales tax.
The sales tax is due whenever the taxable fees are contractually due,
whether this occurs during the implementation stage or after the customers
begin accessing the software.
Again, whether the purchase of the canned computer
software is taxable depends on if the software is downloaded or delivered to a
location under the control of the purchaser. If the software is in such
possession by the customer, then any fees paid for the software are taxable,
whether the fees are for a perpetual license, a term license, or are based on a
per transaction or percentage of the transaction dollar amount charge. This is true whether the taxable fees are
paid by the customer to the host provider or the Taxpayer, or paid by the host
provider to the Taxpayer.
Any
additional charges for updates and installation would also be taxable, as
discussed earlier. From your definition
of the term “maintenance,” telephone support service represents a nominal
portion of the maintenance contract price, with the majority of the contract
price representing software updates.
Accordingly, the maintenance service sold by the Taxpayer is considered
to be essentially the sale of updates to the canned computer software. As such, the maintenance service is taxable
in accordance with Rule 92.
Concerning expenses for travel and meals, any charges
associated with a taxable service are considered to be an element of the total
charge for that taxable service. As
such, these expenses are also subject to sales tax. For example, if you charge travel and meal expenses to a customer
when providing taxable consulting (installation) or maintenance services, those
expenses, including lodging, rental car, airfare and travel time charges, are
also taxable.
For purposes of sales and use tax, “purchase price” means
the “amount paid or charged for tangible personal property . . . .” See Utah Code Ann. §59-12-102(20). Whether the Taxpayer receives cash or some
other commodity as consideration for the tangible personal property it sells,
sales tax is due on the purchase price paid for the property. Accordingly, any usage fees the Taxpayer
receives for taxable canned computer software are subject to sales tax, even if
the software is contributed to a company in exchange for stockholder’s
equity. Sales and use tax is due
because the stockholder’s equity is the purchase price paid for the
software.
Most
exchanges of taxable tangible personal property for equity are typically exempt
from taxation under the isolated and occasional sale exemption provided in Utah
Code Ann. §59-12-104(13) because the entity trading the property for equity is
not in the business of selling that property.
In this case, however, the Taxpayer is in the business of selling
computer software, and its exchange of taxable software for equity would not
qualify for the isolated and occasional sale exemption. Accordingly, under Taxpayer’s circumstances,
sales tax is due on the market value of the stock on the date of the contract
to “sell” or exchange the software for the equity. Should the market value of the stock that is exchanged for the
software be indeterminable, then the average retail selling price of the
software could be substituted as the purchase price on which sales tax is
collected and paid.
Any taxable services associated with software remain
taxable as described in the previous scenarios, even if the software is
exchanged for stockholder equity.
Should you have any other questions, please contact us.
For
the Commission,
COMMISSION
REP
Commissioner
MBJ/KC
01-027
[1] In South Cent. Utah Tel. Ass'n v. Auditing Div. Of the Utah State Tax Comm'n, 951 P.2d 218 (Utah 1997), the Utah Supreme Court determined that the electronic signals of installed software are tangible. Accordingly, a customer who receives canned computer software electronically is in possession of taxable tangible personal property.
[2] As an example, if a legal database company sends a compilation of all State cases to a customer either in a book, on a disk, or by downloading them electronically, the company has sold tangible personal property. However, Utah does not currently charge sales and use tax on a transaction that allows the customer to use the Internet to view the State cases for a fee on a “host provider,” as long as the customer does not download the software onto his or her own computer.