97-062
Response
October 15, 1997
April
13, 1997
Ms.
Irene Rees
USTC
21O
N. 1950W
Salt
Lake City, Utah 84134
RE:
Letter ruling request
Dear
Ms. Rees:
We
are writing to respectfully request a letter mung as to the sales and use tax treatment
of
certain activities in your state. Specifically, we are writing to receive
clarification as to
the
tax treatment of the products arid services offered by a computer software
company.
Facts
Company
is in the business of developing, marketing and installing information Systems
and computer software for large corporations. Company also is in the business
of providing professional consulting services Company offers the following
products and services under separate agreements for sale;
1. Computer
software license a perpetual license to use a specific software program.
2. Computer
software maintenance - an agreement to provide a customer with phone
support and upgrades to
the perpetual license.
3. Professional
services agreement - an agreement in which Company will provide
various professional
services to the purchaser including;
• Consulting on the planning of any
customization
• Consulting on the methodology to
achieve the purchaser's goals for the software
• Customer re-engineering services to
assist purchaser with overall organizational changes & centralization of
lines of business or overall corporate structures
• Customizing the data of the customer
to work with the software
• Creation of new custom software to be
used only by the customer
• Creation of interfaces to link
systems together
Company
enters into a software license agreement with a customer in Utah. In the
license agreement it clearly states that the software must be customized to fit
the Utah customer's
specific
application requirements. The software can not be used by the customer to
satisfy their needs without extensive customization. The software license is a
"basic shell" of a program in which the customer will need
significant modifications, In the end, the charges for modifications will far
exceed the initial charge for the software and the software will be specific to
the customer Company also enters into a software maintenance agreement as well
as a professional services agreement with the Utah customer.
Company
performs many services under the professional services agreement. Company
advises the Utah customer on the planning of the customization, the methods to
achieve the customer's goals and the phasing, timing and implementation of each
module of software in connection with the customization. Company customizes the
software and provides the modifications and enhancements requested by the
customer. Company provides overall consulting & re-engineering services to
centralize lines of business ,etc.
Company also assists in loading the customized software. Company
performs acceptance tests before & after customization. Company performs
all tasks necessary to fully implement the customized software with the
customer's computer
Systems.
Law
R865-19-92SA.2.
defines custom computer software as "a program or set of programs designed
and written specifically for a particular user. The programs must be custom
ordered and can incorporate preexisting routines, utilities or similar program
components. The addition of a customer name or account titles or codes will not
constitute a custom program". R865-19-92SC. further states that "the
sale, rental or lease of custom computer software constitutes a sale of
personal services and is exempt from the sales or use tax, regardless of the
form in which the software is purchased or transferred Charges for services
such as software maintenance, consultation in connection with a sale or lease,
enhancements, or upgrading of custom software are not taxable.
Ruling
Request
We
are writing to request your written confirmation that the above charges are
exempt as
sales
of personal services and is exempt from sales and use tax.
We
appreciate your assistance in this matter. if you have any questions, please
call me
#####.
Very
truly yours,
NAME
October 15, 1997
NAME
ADDRESS
CITY
STATE ZIP
Advisory
Opinion - Application of sales tax to sales of computer software
Dear
NAME,
We have received your request for sales
tax guidance pertaining to charges for use of software, maintenance, and
consulting. We offer the following:
A license to use software is the
same as a lease or rental of software.
Therefore, sales by your client of a license to use their software is
exempt for sales taxation only if the software is “custom software.”
Utah Administrative rule R865-19S-92
distinguishes exempt custom software from taxable “canned” or prewritten
software. The software in question is,
to some degree, prewritten. The “basic
shell” of the prewritten program is then modified for each particular
customer’s use. To qualify for
exemption, the adaptation or modification of the prewritten software 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 bundling several prewritten components into
a set which may be unique to one user.
We do not have the facts before us,
but you represent the modifications as “extensive” and “significant.” We assume for purposes of this opinion that
the modification surpasses the threshhold requirements for customizing
software. In that event, charges for
consultation, enhancements and upgrades are also exempt.
Please let us know if you have
additional questions.
For
the Commission,
Joe
B. Pacheco,
Commissioner
^^