97-003

Response January 16, 1997

REQUEST LETTER

December 27, 1996

Dear Mr. XXXXX:

We would like to seek your assistance in ascertaining our client' s liability under the Utah Sales Tax Law.

Our client, a state vendor, licenses computer software under an agreement that also incorporates development, maintenance and training services as an option to their customers for a set of separately stated fees. The training program can take place in New York or in Utah. All agreements are executed in New York.

The licensing agreement grants the end user a non‑exclusive, non‑ transferable license to use the copy of the software program(s), any accompanying documentation and related materials with a single computer unit or workstation at a single physical location. It also clearly states that "This license is not a sale of the software or any copy thereof," and that the licensing corporation "Retains title, copyright and ownership of the software recorded on the enclosed disk(s) and accompanying documentation and all copies of these."

What would be the sales tax exposure of our client in Utah. Is software licensed under above stated terms and conditions and other related services subject to sales tax? We would very much appreciate receiving any written information regarding out‑of‑state vendors and registration materials in case our client is required to register under the Utah sales tax law.

With best wishes for the holiday season, I remain

Sincerely yours,

XXXXX

RESPONSE LETTER

January 16, 1997

NAME

ADDRESS

CITY, STATE, ZIP

Advisory Opinion - Application to sales or leases of software and related services and materials

Dear XXXXX,

We have received your request for information pertaining to the application of sales tax to software and related services and materials marketed by your client to customers in Utah. We offer the following tax guidance:

Sales or leases of Acanned@ or Aprewritten@ software is taxable in Utah. Charges for Acustom@ software are considered charges for non-taxable personal services. The application of sales tax to your client=s transactions, then, depend upon the nature of the software.

Canned or prewritten software are terms that apply to software that is designed and written for sale to a general market. Examples of this type of software are word processing programs or spread sheet programs that may be purchased by a variety of customers and used for a variety of purposes. In contrast, custom software is specifically developed to meet the specifications of a particular customer or user. If your client is dealing in taxable software, sales tax cannot be avoided on the basis of a licensing agreement. A licensing agreement is considered to be a lease or rental of the software, and the transaction is subject to sales or use tax.

With regard to sales or leases of taxable canned software, charges for program maintenance, upgrades, enhancements documentation or training and consultation are also taxable. If the licensing agreement covers any taxable item, the entire agreement is taxable, except that charges for services to modify or adapt Acanned@ computer software are not taxable if separately stated. To qualify for this limited exemption, the adaptation or modification must do more than "personalize" the software. The adaptation must change the functional operation of the canned program. Adding the customer name or account title is not enough; nor is merely bundling several prewritten components into a set.

If your client has nexus with Utah, your client is responsible for collecting and remitting sales or use tax on its taxable Utah transactions. Utah Code Section 59‑12‑107 (5) states, in pertinent part:

(1) (a) Each vendor shall pay or collect and remit the sales and use taxes imposed by this chapter if within this state the vendor:

(i) has or utilizes an office, distribution house, sales house, warehouse, service enterprise, or other place of business;

(ii) maintains a stock of goods;

. . .

(iv) regularly engages in the delivery of property in this state other than by common carrier or United States mail; or

(v) regularly engages in any activity in connection with the leasing or servicing of property located within this state.

Your client seems to fit within the conditions set out in (v) above. Therefore, your client must collect tax on all payments received under taxable licensing agreements in Utah. Your client may use the enclosed form to apply for a Utah sales tax license. If you or your client have questions about this form, please contact our Customer Service Division at ##### for assistance.

For the Commission,

XXXXX,

Commissioner

JBP/IR

97-003

Enclosure