Response February 10,
1993
Request
Utah State Tax
Commission
Attn: Correspondence
160 East 300 South
Salt Lake City,
UT 84134
Dear Madam/Sir,
This letter represents
a request for a written ruling from the state of a sales tax issue.
XXXXX (XXXXX), is a
California based high technology company engaged in the business of
manufacturing three dimensional graphics computer systems.
The corporation is
registered to collect sales and use tax in the state from its customers.
XXXXX is the inventor
and owner of a high level programming language for applications using three
dimensional graphics, called, “XXXXX”.
This program features graphics XXXXX (XXXXX).
XXXXX provides 2D and
3D graphics functions to software programmers.
The functions include modelling, transformations, lighting, color,
shading and motion, and more advanced features like texture mapping and sophisticated
frame buffer effects such as alpha blending and motion blur. The commands provide software developers
advanced graphics capabilities in an elegant, easy to use programming
environment.
Licensees integrate
XXXXX into various window and operating system environments, such as the XXXXX. The licensees adapt the XXXXX into a range
of computing environments, from PC’s and Mac’s, to workstations,
supercomputers, or proprietary graphics hardware.
XXXXX formal
specifications and source code are released to the Licensees by XXXXX. The licensee, is granted a limited,
non-exclusive, non-transferable, royalty-bearing license and the right to use
and modify the information and data contained in the specification and to use
and modify the source code, solely to created a Derived Program.
“Derived Program”
means a binary (object code) version of a software program created by compiling
(I) Licensee Source, and/or (ii) a version of an implementation or any portion
of XXXXX Source that Licensee has modified and/or ported to be compatible with
Licensee’s Product.
The licensee is
granted a limited, non-exclusive, non-transferable, royalty-bearing worldwide
license and right to duplicate, use and distribute by sublicense copies of the
Derived Programs for use with Licensee’s Product. A royalty is charged on a per copy basis for each XXXXX object
code distributed by the Licensee.
XXXXX is licensable at
three levels,
Level 1 License: Designed to provide the XXXXX specification
and necessary support information and code to licensees wishing to implement
XXXXX internally. Licensees are
permitted to redistribute XXXXX binaries to end users.
Level 2 License: Provides, in addition to Level 1 License,
source code implementing the XXXXX to licensees. Licensees are permitted to redistribute XXXXX binaries to end
users.
Level 3 License: Provides licensees the right to redistribute
modified XXXXX source code to third parties who are already XXXXX source
licensees. Includes all Level 1 and Level
2 license information and source code.
Support, maintenance and
interim updates for source codes and specifications are available to XXXXX
licensees under annual support contracts with XXXXX. Different prices are charged for each Level of license.
The common features in
the three levels of the Licenses are:
(1) the transfer of
XXXXX source code and specifications, to the licensee, for a fee under the
license agreement.
(2) the licensee has a right to duplicate, use
and distribute, by sublicense, copies of the Derived Programs for use with
licensee’s product.
(3) a royalty charge, by XXXXX, to the licensee
of a per copy basis of the XXXXX object code distributed.
We seek your
clarifications on the following questions.
(1) Is the transfer of XXXXX source code and
specifications, to the licensee, under the situations described above, subject
to sales tax in your State?
Please note that the
source code, by itself, is of little use to the licensee. It is the software programs the licensee
derives from the source code that is material.
In very basic terms, the source code can be described as a tool used by
the licensee along with other tools, to derive a software program that can
operate on the licensee’s products.
Once the software program is derived, the licensee can sell, license or
distribute copies to its customers.
(2) If the answer to question (1) is “NO”, what
documents must XXXXX keep for its records to substantiate the non-taxable
nature of the transaction?
(3) If the answer to question (2) is “YES”, what
is the code section/authority for such determination?
(4) Is the royalty paid to XXXXX subject to
sales tax in the State?
(5) Are the charges for support and maintenance
of the source code, which includes interim updates to the source code, subject
to sales tax in the State?
Will the taxability
change if charges for updates are separately stated in the contract?
We would appreciate an
early response to the questions stated above.
If you have any questions please contact me at XXXXX.
Sincerely,
XXXXX
TO: XXXXX, Director
FROM: XXXXX, Secretary
DATE: XXXXX
SUBJECT: Request for Advisory opinion - No. 93-003DJ
Attached is a request
for a written ruling from XXXXX of XXXXX.
Will you please review the request of XXXXX regarding sales tax on
transfer of XXXXX and specifications to the licensee.
Please prepare the
response for signature by the Commission as per the guidelines established by
them.
Thank you.
XXXXX
Dear XXXXX:
In response to your
letter of XXXXX (copy attached), I am providing you with the following
information.
(1) It is the opinion of this office that the
transfer of the source code and specifications as described in your letter
constitutes the sale or rental of tangible personal property and, as such, is subject
to the Utah sales/use tax.
(2) Not applicable.
(3) The statutory reference for the above
treatment is Utah Code Annotated Section 59-12-103 (copy attached).
(4) If the royalty charge is, as I understand
it, a charge for distribution of “Derived Programs” by the original licensee
using your source code, the royalty would be exempt.
(5) Support and maintenance charges would be
subject to the tax regardless of how the charges might be broken down or
separately stated. See Tax Commission
Administrative Rule R865-19-92S.
If you have further
questions, please feel free to contact me.
In contacting the Tax
Commission, if special accommodations are needed in accordance with the
Americans with Disabilities Act, please call (801) 530-6920, (801) 530-6077 or
TDD (801) 530-6269 allowing three working days notice.
Respectfully,
XXXXX
Telephone No. XXXXX