96-120
Response
August 5, 1996
Request
XXXXX
State
Tax Commission
Heber
M. Wells Bldg
160
East 300 South
Salt
Lake City, UT 84134
Re:
Letter of Opinion
Gentlemen:
XXXXX is a software and publication
company specializing in Sales, Use, Property and Payroll Taxation. A formal opinion on the application, if any,
of Sales/Use Tax is hereby requested on the following transaction.
Transaction
The XXXXX software contains a copyrighted calculation
system known as source code. The source
code is contained in our software, however, our customers do not have access to
the code.
Each customer purchasing our software system will be
given the option of paying an Escrow Fee.
The Escrow Fee entitles the customer to file a claim with an escrow
company, which will retain the source code for the software. A claim may only be filed if XXXXX were
to cease doing business. The Escrow
Fee will be separately line itemized on the invoice and renewable annually at
the customer’s option. Should the
customer decline to renew the Escrow Fee, they will forfeit their right to file
a claim with the escrow company for the source code in the event XXXXX ceases
doing business.
Question
Is the Escrow Fee an intangible property or tangible
personal property transaction?
Is the Escrow Fee subject to Sales or Use Tax when the
customer is invoiced for their initial purchase?
Is the annual renewal fee subject to Sales or Use tax?
Your assistance in providing an
answer to the above questions would be greatly appreciated. Should you have any questions or require
further information, contact me at XXXXX.
Sincerely,
XXXXX
XXXXX
RE: Advisory
Opinion - Application of Utah Sales and Use Tax
Dea
r XXXXX
We have received your request for an
opinion regarding your company’s obligation to collect and remit sales and use
tax on the escrow fees it charges Utah customers. We understand that payment of the escrow fee allows your customers
access to your company’s source code in the event your company ceases
business. We offer the following
guidance:
Vendors are required to collect and
remit Utah sales and use tax for sales of all tangible personal property sold
to customers within the state of Utah.
Section 59-12-103(1)(n) of the Utah
Code states in pertinent part:
(1) There is levied a tax on the
purchaser for the amount paid or charged for the following:
. . .
(n) tangible personal property stored,
used, or consumed in this state.
The Utah Code does not specifically
define “escrow fees” as either tangible or intangible property. However, the escrow fee paid by your
customers is subject to Utah sales and use tax under certain circumstances. For example, charges for software support
and maintenance are subject to Utah sales and use tax under Utah Code
§59-12-103(1)(I). Furthermore, the Tax
Commission has interpreted support and maintenance of “canned computer
software” as a taxable service under Utah Admin. R. R865-19S-92(B). Therefore, if you include charges for
software support and maintenance in the escrow fee charged to your customers,
your company must collect and remit the Utah sales and use tax for that portion
of the fee.
Conversely, if the escrow fee
charged to your customers does not include charges for software support and
maintenance, the escrow fee would resemble some of the types of intangible
property included in Utah Code §59-12-102(18)(b). In such a situation, your customers would be purchasing an
“intangible right” to the source code by paying the escrow fee. Therefore, the escrow fee would not be
taxable and your company would not need to collect and remit the Utah sales and
use tax for it.
Section 59-12-102(18)(b) states in
pertinent part:
(b) “Tangible personal property”
does not include:
. . .
(ii) bank accounts, stocks, bonds,
mortgages, notes, and other evidence of debt;
(iii) insurance certificates or
policies;
. . .
It is unclear from the information
provided in your letter whether or not the escrow fee charged to your customers
includes charges for software maintenance and support. If the fee does include such charges, then
those charges are subject to Utah sales and use tax.
Please contact us again if you have
further questions.
For
the Commission,
Alice
Shearer,
Commissioner