97-064
Response
November 18, 1997
September
26, 1997
Subjects: (1) Taxability of Electronic Keys
(2) Taxability of World Wide Web Design and
Hosting
(3) Nexus Thresholds
Dear
NAME:
It
would be very much appreciated if you would provide a timely (within 10
business days of receipt of this request) advisory opinion or letter ruling
addressing the taxability of electronic keys, the taxability of world wide web
design and hosting, and nexus thresholds.
ELECTRONIC
KEYS
The
COMPANY A is located in Utah. COMPANY A manufactures CD ROMs that are essentially
catalogs of software applications. The CDS incorporate both demonstration and
full retail versions of each application. The CDS are distributed to potential
customers through a variety of media, e.g. given away inside of computer
magazines. The CDs are never sold.
Software
vendors provide COMPANY A with master copies of their software and, for a fee,
COMPANY A loads the software onto a “catalog” CD. Customers may receive the COMPANY A CD inside of a computer
magazine to install on their computers and preview demonstrations of the
software. Customers wishing to purchase the software, contact COMPANY A via
phone or website and provide a charge/debit card account number as payment.
Once on-line authorization is confirmed, an electronic key is provided to the
customer that allows access to the full retail software application purchased
that is also on the CD the customer already has.
COMPANY
A is in the process of incorporating a subsidiary in the State of Utah. It will operate an office within the
State. The office will be staffed by
telemarketers, minimal management personnel, and potentially, a telephone
support staff. Production of the
COMPANY A CD's will most likely be outsourced to a vendor within the State of
Utah. The manufacturing process
(pressing of the CD's), will be completed on a just in time basis thus
minimizing inventories. A gold master copy will be used by the outsource
provider for duplication and will remain the property of COMPANY A.
What are the state sales and use tax
implications of the activities described above?
Please
cite the appropriate legal reference used as a basis for your opinion.
WEB
DESIGN AND WEB HOSTING
ABC
Co. designs and hosts world wide web sites on the Internet. Designing web sites
typically involves custom programming using the HTML programming language. Currently,
ABC is located and doing business with the State of Utah. ABC does not transfer any tangible person
property in conjunction with its services. The server (the computer hardware
that connects the web site to the Internet) is located within the State.
1. How does the State of Utah treat the taxability of designing
and hosting services of world wide web sites?
2. Are charges for accessing web-sites, e.g subscriptions (to
access on-line games, chat rooms, etc.), subject to sales tax?
3. Would the taxability be any different
if the server was located out of the State?
4. If an out-of-state retailer whose only contact with the
State is the use of a computer server on the Internet to maintain a web site
considered to have substantial nexus for sales and use tax purposes within the
State of Utah?
Please
cite the appropriate legal references used as a basis for your opinions.
NEXUS
THRESHOLDS
Please
provide the parameters that establish nexus for
1) income tax purposes,
2) franchise tax purposes, and
3) excise tax purposes.
If
you are not able to answer this question completely, please forward a copy this
letter to
the
appropriate state taxation party for a timely response. If I have addressed this request for an
advisory opinion or letter ruling to you in error, please accept my apologies
and forward this letter to the appropriate state taxation party. In your department's response letter, please
provide the name, direct telephone number, and mailing addresses of
1) a person whom I can contact in the
legal department for future correspondence
2) a person whom I can contact regarding
contractual or voluntary registrations.
I
will update my records upon receipt of your department's response.
Very
truly yours,
NAME
November
18, 1997
NAME
ADDRESS
CITY
STATE ZIP
Advisory
Opinion - Application of sales tax to sales of computer software and electronic
media services.
Dear
NAME,
We have received your request for
sales tax guidance pertaining to the sale of computer software and electronic
media services. We offer the following:
We begin by answering your questions
about nexus because that issue impacts a vendor’s responsibilities to collect
and remit sales and other taxes in Utah.
Enclosed is a publication that provides general information on nexus
thresholds. You have described two
scenarios in which your client maintains an office, employees or other physical
presence in Utah. That is enough to create nexus for both sales tax and
corporate franchise tax purposes. We do
not administer an excise tax.
Your first question concerns sales
of non-custom software. Your client
distributes CDS containing non-custom software to potential buyers. The CD itself is initially given to the
potential customer, but if the customer agrees to purchase the non-custom
software that resides on the CD, your client provides the customer with a password
or “electronic key” to access the software.
If that customer is in Utah, the sale is a Utah sale for purposes of
both sales tax and corporate franchise tax.
Utah Code Ann. §59-12-103 and Utah Admin. Rule R865-19S-92. If your client is making Utah sales, it must
obtain a Utah sales tax license and collect, report and remit the tax as
required by law. Utah Code Ann.
§§59-12-106 and -107.
The production of the CDS may take
place in Utah. However, since your
client will outsource that production to another party, we will not go into
detail here about the sales tax obligations and manufacturing exemptions that
may come into play for the producer. If
you have questions on this issue, please let us know.
Regarding your client’s charges for
web page design and internet access subscription
charges,
these charges are not subject to sales tax in Utah. As to the nexus of an out-of-state retailer who solicits and
makes sales of products over the internet, the nexus determination depends upon
full consideration of the retailer’s activities in Utah. Because that is a fact-specific
determination, we cannot offer you a general response that will apply to all
retailers.
Requests for advisory opinions may
be addressed in writing to the Tax Commission in care of Irene Rees, 210 N.
1950 W., Salt Lake City, Utah 84134.
Requests for general taxpayer information may be directed to the
Technical Research Section of the Customer Service Division, either in writing
or by telephone at (801) 297-3257.
Please let us know if you have other
questions
For
the Commission,
Joe
B. Pacheco,
Commissioner
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