92-029
Response March 10, 1993 and February 17, 1993
March
10, 1993
XXXXX
Dear
XXXXX:
I'm
responding to your telephone call of XXXXX, wherein you requested an expansion of
our response to your second issue in your computer software advisory opinion
request. You recall that my letter stated that the Commission considers canned
computer software transferred onto a customers own diskette to be taxable.
In
reference to your question "By what authority," I refer you to Tax
Commission Rule R865-19-92S(A)(l) and (B) which states:
"Canned
computer software" or "prewritten computer software" means a
program or set of programs that can be purchased or used without modification
and has not been prepared at the special request of the purchaser to meet their
particular needs.
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.
The
transfer to the customer hard drive of the right to use the canned software is
the taxable transaction. Thus, the transfer of the program with permission to
use constitutes a transfer for consumption regardless of the mode of transfer.
The economic function of the canned software was to be resold and that is what
is being done in your example.
In
rule R865-19-92S, canned computer software constitutes a sale of tangible
personal property subject to the sales tax. Tax Commission rule R865-19-26S
where taxable personal property is defined says "Tangible personal
property" means all goods, wares, merchandise, produce, and commodities,
all tangible or corporeal things and substances which are dealt in or capable
of being possessed or exchanged. The rule goes on to list things that are not
included as tangible personal property and canned computer software is not
mentioned.
I
believe the above is essentially what we talked about. If you do not agree with
this determination, you may appeal to the Tax Commission for a formal hearing.
The appeals procedure were mailed in my previous correspondence. Should you
have any additional question, please do not hesitate to call.
Sincerely,
Joe
B. Pacheco
Commissioner
Utah
State Tax Commission
160
East Third South
Salt
Lake City, Utah 84134
March
10, 1993
Dear
Joe,
As
mentioned over the phone recently, I am becoming increasingly concerned about
the recent lack of meaningful responses by the Auditing Division to petitions for
redetermination and advisory opinions.
The
Tax Commission requires petitioners for redetermination or those who request
advisory opinions to outline their "statement of facts and reasons"
and "summary of arguments and authorities relied upon." Upon receipt
of the required information from the petitioner, the agency will routinely,
without giving explanations, "deny" the request, "deny"
petitioners arguments, or "disagree" with positions outlined in
advisory requests. Seemingly, the Auditing Division and the Tax Commission feel
they have no responsibility, professionally or as a matter of courtesy, to give
any substantive reasons for their negative responses.
Specifically,
I would appreciate your revisiting, again, my request for an advisory opinion
regarding transfer of software by electronic means or on customer furnished
medium. As mentioned, I am concerned about your apparent rational to tax an
intangible (i.e. electrical impulses).
In
addition, would you ask someone to write and give some rational for answers to
our petition regarding certain fuel issues. Enclosed are copies of our request
for advisory opinion, your denial letter, our petition, and the agency's
answer.
Joe,
if you have any suggestions as to how we can better present our requests for
advisory opinions in order to obtain answers which would include the Tax
Commission's "facts and reasons," please advise. I would like to be
able to give the copies of requests and answers to the UACPA and impacted
business association groups. Don't you agree that attorneys and business
associates should have ready access to all policy decisions (sanitized as
needed)?
As
mentioned to you, I understand the auditing division has an updated topical
summary of attorney general opinions, advisory opinions, declaratory
judgements, commission decisions, court cases, etc. This summary, especially if
kept current, would be a great tool for your field auditors, and public
accountants and attorneys. Would you verify when the publication will be made
available (sanitized as needed) for the public. This would save me the expense
of sending out incomplete, unofficial information to those I perceive as being
interested parties to certain opinions and decisions of which I am aware.
The
original request for the software opinion was dated XXXXX. Your opinion wasn't
received until XXXXX, then corrected on XXXXX. Your answer to this letter
within the next couple of weeks would be appreciated.
Thank
you.
Respectfully,
XXXXX
XXXXX
Re:
Computer Software & Software Maintenance
Dear
XXXXX:
On
XXXXX I mailed you an answer to your request for advisory opinion on computer
software and software maintenance. I regret, at this time, to enclose an
updated version of what my response should have said.
I
apologize for any inconvenience that may have transpired since receipt of my
February 1st letter. However, I hope you will understand what caused the mix-up
at my desk. Prior to February 1st, you recall that I had informed you verbally
that we were studying this particular issue and that it was a complex issue.
Obviously there were other things under consideration. Unfortunately, another
version had been drafted, and inadvertently included language from a prior
draft in the draft I sent you.
Again,
please accept my apology and included under separate cover is a new response to
your request.
Should
you have any questions regarding the above, please contact me and I will be
glad to discuss them with you.
Sincerely,
Joe
B. Pacheco
Commissioner
XXXXX
Re:
Computer Software & Software Maintenance
Dear
XXXXX:
Your
request for an advisory opinion concerning four fact situations dealing with
the purchase of computer software and software maintenance agreements has been referred
to the Auditing Division for their analysis.
It
is the division staff recommendation that:
1.
The purchase of canned computer software received over a telephone modem is
taxable.
2
. Canned computer software transferred onto a customers own tape or diskette is
taxable.
3.
If the original sale of software was taxable, a subsequent charge for a
maintenance agreement is also taxable. A charge for consultation only or for an
agreement to receive maintenance instructions over the telephone is non-taxable.
If a maintenance agreement provides for consultation as well as updates and
hands on service to a software program, the sale of the agreement is taxable
even if the software had been transferred over a telephone modem or installed
on the customer's diskette. A charge for enhancements or updates received via a
telephone modem is taxable.
4.
If a company purchases five licensed copies of a particular prewritten software
program and does so over a telephone modem, but chooses to purchase only one
copy of the documentation, the entire purchase of the five copies of the
program and the single copy of documentation is taxable.
Based
upon the facts presented in your letter, we are in agreement with the Auditing
Division's recommendations. Obviously, if there are deviations from these
facts, this opinion may be negated.
If
you do not agree with this determination, you may appeal to the Tax Commission
for a formal hearing. The results of that hearing would constitute a
declaratory judgment and be appealable to the Utah State Supreme Court. A
Notice of Appeal Rights and a copy of the Utah Taxpayer Bill of Rights are
attached.
To
arrange for Americans with Disabilities Act accommodations, please contact the
Tax Commission at (801) 530-6920, (801) 530-6077 or TDD (801) 530-6269 allowing
three working days notice.
For
the Commission,
Joe
B. Pacheco
Commissioner
Mr.
Joe Pacheco, Commissioner
Utah
State Tax Commission
Heber
State Tax Commission
160
East 300 South
Salt
Lake City, Utah 84134
Dear
Commissioner Pacheco:
Enclosed
is a copy of our request for advisory opinion, dated XXXXX. My last contact
about this matter was with XXXXX, who indicated the opinion was written,
revised and then due to be mailed out. That was about two weeks ago.
Would
you please check the status of this request and advise when we can expect a
response?
Thank
you.
Respectfully,
XXXXX
Mr.
Joe Pacheco, Commissioner
Utah
State Tax Commission
Heber
J. Wells Building
160
East 300 South
Salt
Lake City, Utah 84134
RE:
Advisory Opinion Request - Application of sales tax to certain charges for
computer software and related service contracts
Dear
Commissioner Pacheco:
An
advisory opinion is requested regarding sales tax Rule R865-19-92S. As is the
case with many new or revised rules, issues come up that were not anticipated
during the rule making process. Our request involves specific issues related to
the sale and maintenance or service of non-custom software.
First
Issue
Statement
of Facts
On
occasion, software providers (non-custom) will transfer their software product
by way of phone modems. The software is transmitted by the vendor over phone
lines and directly interfaced with their customer's computer, resulting in the
direct transfer of software to the customer's hard drive. We have advised our
client that this transaction is not subject to sales tax since there is not a
sale or repair of tangible personal property. We feel the XXXXX Supreme Court
case supports this position since it taxed a "mailing list" that was
conveyed by "either printed sheets or computer tapes." The court
ruled that if the real object of the sales transaction was tangible personal
property (e.g., printed sheets), the imposition of use tax (on mailing lists)
was proper. The court recognized the question of whether computer tapes were
tangible personal property as more
difficult question. However, the Utah Supreme Court ruled, "whether the
information is supplied on gummed labels, typed lists or computer tapes, an
item of tangible personal property is transferred, and the transaction is
taxable."
It
appears clear that the court was looking for something corporeal, tangible and
physically measurable upon which to apply the tax. In our example, nothing
physical is being transferred from vendor to customer (i.e., Rule R865-19-26S).
Therefore, in absence of legislation taxing an intangible (e.g., admissions and
utility services), such a method of selling software is non-taxable.
Request
for Advisory Opinion
Based
on the foregoing information, it is respectfully requested that your advisory
opinion will find that information (i.e., software) transmitted over phone
lines is not a sale or repair of tangible personal property, and therefore, not
subject to sales tax.
Second
Issue
Statement
of Facts
A
customer sends a blank tape or diskette to a software vendor that transfers a
non-custom program to the diskette. Since the vendor is transferring information
onto the customer's property (i.e., the tape or diskette), and not selling,
installing or repairing tangible personal property, we are of the opinion a
taxable transaction does not exist.
Request
for Advisory Opinion
Based
on the foregoing information, it is respectfully requested that your advisory
opinion will find that information software transferred onto a customer's own
tape or diskette is not a sale or repair of tangible personal property, and
therefore, not subject to sales tax.
Third
Issue
Statement
of Facts
Service/Maintenance
contracts often provide for a combination of consultation, enhancements,
updates, etc. for software previously sold. We need clarification on a number
of issues involving these contracts.
Our
first assumption is that the original sale of software was taxable.
Our
second assumption is that the original sale of software was not taxable based
on transfer by phone modem or on customer furnished tape or diskette
(non-custom program) .
Request
for Advisory Opinion
Based
on the foregoing information and the listed assumptions, it is respectfully
requested that you will find the following statements pertaining to the
application of sales tax correct:
If
the original sale of software is taxable, subsequent charges for
service/maintenance are also generally taxable. However, if a separate periodic
fee is charged only for consultation service and not involving hands on
"repairs" or the furnishing of tangible personal property, sales/use
tax would not apply.
If
the original software sale was non-custom but non-taxable (i.e., transferred
via phone modem or transferred to customer-furnished diskette or tape), the
subsequent charge for service/maintenance would be generally taxable only if
the periodic charges for "service" include tangible personal property
(e.g., annual updates, enhancements, etc.).
However,
charges for enhancements or updates to previously sold programs would not be
subject to tax if the enhancements or updates are sent via phone modem.
Fourth
Issue
Statement
of Facts
Occasionally,
software companies will offer updates to software with or without the
documentation. For example, if a company has five licensed copies of a
particular software program, it may want to keep costs lower by obtaining five
updates to the software, but only one copy of the documentation. If the
documentation and software are sold separately and the software is obtained via
modem or on the customer's own diskettes, it would seem logical that the only
taxable items would be the documentation.
Request
for Advisory Opinion
Based
on the foregoing information, it is respectfully requested that your advisory
opinion will find that if non-custom software and documentation are sold separately,
the charge for documentation would be taxable, unless transmitted via phone
modem or on the customer's own diskettes.
If
your or your staff need additional information or clarification of our
questions, please advise; otherwise we hope to receive an early reply.
Thank
you.
Respectfully,
XXXXX
XXXXX