95-036
Response August 7, 1995
Request
Commissioners
Utah
State Tax Commission
210
north 1950 West
Salt
Lake City, UT 84134
Dear
Commissioners,
Regarding:
Charges for services to adapt canned or prewritten computer software to a
purchaser’s needs.
As
you know, Tax Commission Rules R865-19S-92 D provides that charges for services
to modify or adapt canned computer software or prewritten computer software to
a purchaser’s needs are not taxable if the charges are separately stated and
identified.
We
realize that the extent to which canned software may be modified could range
from minor adjustments to extensive adaptations. We’re assuming this range is included in “modify” or
“adapt.” The rule neither claims to be
all inclusive nor defines these terms.
Most
installations of canned computer software include entry of company and/or individual
names, software serial numbers, and other information to personalize and adapt
that software for use by the purchasing company. It is our understanding that when a vendor installs canned
software and adapts it in any way to a company’s needs, the charges for
installation are exempt from sales or use tax as long as they are separately
stated.
We
are working with a company who has just invested in some expensive canned
computer software. They have also
contracted with a vendor for installation, service, and maintenance. Since installation involves adapting the
software for that company, we have advised the accounting department to list
installation charges, which would not be taxable, separate from the charges for
service or maintenance, which would be taxable.
We
would appreciate your advice on this matter.
Sincerely,
XXXXX
XXXXX
RE:
Advisory Opinion - Application of sales tax to services to adapt canned
software
Dear
XXXXX,
You
requested an advisory opinion regarding modifications or adaptations to
prewritten software. We find as
follows:
Sales
or leases of prewritten or “canned” computer software are subject to sales
tax. Prewritten software means a
program or set of programs which have been developed for sale to a general
market rather than a program designed to meet the specifications of a
particular purchaser.
Charges
for services to modify or adapt prewritten computer software are not taxable if
separately stated and identified. We do
not agree, however, that charges for “minor adjustments” necessarily qualify
for the exemptions. To qualify for
exemption, the adaptation must change the functional operation of the canned
program. Adding the customer name or
account title is not enough. Nor is
bundling several prewritten components into a set which may be unique to one
user.
“Installation”
does not automatically qualify as a service which is eligible for
exemption. Every canned program must be
installed to be used. Without more
facts, we cannot conclude whether the installation charges in your client’s
case are tax exempt. If you can provide
us with more detail about the kinds of changes made to software, we will better
be able to make that determination.
For
the Commission,
Alice
Shearer
Commissioner