Response
February 11, 1994
Request
June
16, 1993
HAND-DELIVERED
Roger
O. Tew, Esq.
Commissioner
Utah
State Tax Commission
Heber
M. Wells Building
160
East 300 South
Salt
Lake City, Utah 84134
Re:
XXXXX Licensed Programs
Dear
Roger:
As
we discussed last week, XXXXX would like to request an advisory ruling as to
whether its licensed custom software is subject to sales and use tax pursuant
to Utah Code Ann. § 59-12-103 and Administrative Rule R865-19-92S.
XXXXX
believes that its licensed custom software (or “XXXXX”) clearly falls within
the definition of “custom computer software” as set out in subsection 2 of
Administrative Rule R865-19-92S. Each
of XXXXX's Licensed Programs is designed and written for a specific customer
and while each incorporates pre-existing modules, no two Licensed Programs are
the same. Simply combining several
modules does not create a software program which would run a customer's
hardware. Further customization is
needed. All XXXXX Licensed Programs
involve a heavy component of customized service by system engineers and
manufacturing personnel.
XXXXX
does charge a sales tax on its “load and go” or canned software. But because its Licensed Programs satisfy
the requirements of Administrative Rule R865-19-92S, XXXXX does not collect a
sales tax on such software and advises its customers that the Licensed Programs
are not subject to sales or use tax.
Unfortunately, from time to time the Commission's audit staff attempts
to assess such a tax on XXXXX's customers.
This, of course, creates serious customer relations problems. Moreover, the customers do not have the
information necessary to defend the categorization of their software as “custom
computer software”.
As
we discussed with XXXXX, XXXXX would be pleased to meet with a team XXXXX
assembles from the audit staff and data processing. I mentioned that approximately fifteen programs make up
approximately 85% of XXXXX's software business. XXXXX would propose that we use one of those programs to
demonstrate the process by which they are designed, written, manufactured and
installed. I am told that the process
is essentially the same for all fifteen as well as the other Licensed
Programs. We could also provide the
Commission “team” with a cross section of the other programs which constitute
the remainder of the Licensed Programs.
XXXXX
will want to involve local as well as out-of-state personnel in this
meeting. We will need a little advanced
notice to arrange all the schedules. Perhaps the Commission's “team” will want
to review some written materials first. Please advise.
Very
truly yours,
XXXXX
TO:
XXXXX, Director
FROM:
XXXXX, Secretary
DATE:
XXXXX
SUBJECT: Request for Advisory Opinion - No. 93-015DJ
Attached
is a request for an advisory ruling from XXXXX for XXXXX. Will you please review the request of XXXXX
as to whether XXXXX's licensed custom software is subject to sales and use tax.
Please
prepare the response for signature by the Commission as per the guidelines
established by them.
Thank
you.
XXXXX
Re: Advisory Opinion -- Request for Advisory
Ruling on XXXXX Licensed Software
Dear
XXXXX:
This
letter is in response to your request dated XXXXX, (copy attached) for the Tax
Commission to issue an advisory ruling as to whether XXXXX's licensed software
is subject to sales and use tax pursuant to Utah Code Ann. 59-12-103 and
Administrative Rule R865-19-92S.
Tax
Commission policy is to treat all such inquiries as requests for advisory
opinions. As such, it was referred to
the Tax Commission's Auditing and Technology Management Divisions for their
analysis and recommendations. These
divisions recommendation is as follows:
For
purposes of this analysis, XXXXX submitted the Licensed programs called XXXXX
and XXXXX as examples. At the request
of the Tax Commission, XXXXX provided copies of the applicable license
agreements, current product descriptions and product pricing for each of these
products.
In
addition to a review of the documents submitted by XXXXX, a manager at the
XXXXX (XXXXX), XXXXX, Manager of XXXXX, was contacted regarding the current
installation at the State of Utah where both XXXXX and XXXXX are installed and
in use.
XXXXX
indicated that the XXXXX and XXXXX products are both obtained from XXXXX on
standard electronic media and installed by XXXXX. As part of the installation, XXXXX is required to configure the
software for their particular hardware environment. This would indicate the software is purchased and used without
modification.
The
product literature provided by XXXXX for both products indicates that functions
and features apply to a specific release of the software, indicated in this instance
by version numbers (a common industry practice). Customers obtaining a release of the software obtain the same
functionality based upon a common pricing schedule, and obtain a common set of
documentation and product literature.
This would tend to characterize this software as not having been
prepared at the special request of the purchaser.
The
license agreements submitted by XXXXX indicate in the section regarding
warranties that XXXXX's Licensed Programs will comply with the applicable
“Specifications”. These specifications
are, in fact, XXXXX's specifications and not those of a specific customer. In addition, the XXXXX agreement contained
an additional statement that XXXXX “does not warrant that the functions
contained in a Program will meet your (meaning customer's) requirements”. While
XXXXX does solicit general customer input through organizations such as XXXXX,
actual software releases are based upon XXXXX's own specifications and are
intended for general use.
The
XXXXX Licensed Programs used as examples in this analysis are generally
available products that can be purchased by any customer who also purchases
appropriate hardware. The actual
process of delivering the software to the customer, as described by XXXXX, is
as follow:
-
Customer indicates interest in purchasing the XXXXX Licensed Program and meets
with appropriate XXXXX representatives to identify current environment and
applicability of the requested software.
-
XXXXX Systems Engineer sits at a special terminal at XXXXX and uses a
configurator application to specifically identify the customer environment.
This involves responding to questions about hardware, release levels of
different components, specific configuration, etc. This process was stated as taking approximately 2 hours.
-
An order is placed with XXXXX (uncertain if this is the actual name of an XXXXX
subsidiary or just a way of referencing a portion of XXXXX's organization) with
these specifications. This organization
uses the specifications to build the Licensed Program for this specific
customer, essentially from a set of preexisting routines or programs. Custom routines (meaning routines developed
specifically for this customer), while not common, are on occasion required.
-
Software is shipped to the customer, and XXXXX initiates efforts to plan for
actual installation. Installation then involves final tailoring for the
customer's specific environment (a process that XXXXX suggests can, at times,
take a matter of months).
The
essence of XXXXX's argument is that their method of providing this software
involves preexisting routines but is essentially directed at meeting the needs
of a particular user. The rule
specifically allows for custom software to be built from preexisting routines,
so XXXXX suggests that the effort involved essentially builds custom software
unique to each customer (and therefore for a particular user).
This
effort described by XXXXX does not fit the requirement of being “designed and
programmed for a particular user.” The
preexisting routines are prewritten software that has been prepared for any
purchaser of a given XXXXX hardware platform, in conformance to general XXXXX
specifications and not those of a particular customer.
While
XXXXX mainframes represent complex and expensive environments, where the cost
of adaptation and configuration can be high, they are not unique in requiring
that software that has essentially been prewritten be adapted and customized
for specific customer environments.
XXXXX's
Licensed Programs are prewritten software not custom and would therefore be
subject to sales tax.
Based
upon the facts presented, we are in agreement with the Auditing and Technology
Management Division's recommendation.
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.
For
the Commission,
Alice
Shearer
Commissioner