99-014

Response June 9, 1999

REQUEST LETTER

September 9,1998

Dear Commissioners:

Regarding: Computer software used to operate manufacturing equipment.

One of our clients produces machine embroidered shirts. The equipment that is used to apply the embroidered designs is controlled by a computer using prewritten software.

We realize that normally purchases of prewritten software are taxable; however, in this instance as in other instances of use among manufacturers, the software is used as a A... . peripheral device that is essential to a continuous manufacturing process....@ to A . . . control the operation of machinery and equipment . . .@ , as stated in R865-19S-85 A. 3. b, which partially defines Amachinery and equipment for the@ purpose of the exemption from sales or use tax provided by UCA 59-12-104(15).

It seems obvious that the software controls the operation of the equipment, but there may be a question about whether software can be characterized as a device. With that in mind, we offer the following:

1. A mold is specifically mentioned in Tax Commission Rule R865-19S-85 as an example of a qualifying peripheral device. In the use mentioned above, the software performs a function similar to that of a mold, which is controlling the appearance of the finished design.

2. In part, Webster's Ninth New Collegiate Dictionary defines a Adevice@ as

something devised... as a... procedure [or] technique. . .@ or A... a mechanism designed to... perform a special function...@ and a Amechanism@ is defined as A... a process or technique for

achieving a result...@ These definitions seem broad enough to include computer software.

We would appreciate your opinion as to whether purchases of prewritten computer software used to control manufacturing machinery or equipment are eligible for the exemption for new or expanding operations and normal operating replacements.

Sincerely

NAME

RESPONSE LETTER

June 9, 1999

NAME

COMPANY

RE: Application of the Manufacturing Equipment Exemption to Computer Software

Dear NAME,

We have received your request concerning the application of the manufacturing equipment exemption to computer software that controls a piece of equipment that applies embroidered designs on shirts. To qualify for the manufacturing equipment exemption, Utah Code. Ann. '59-12-104(14) requires that the computer software be machinery and equipment that (1) has an economic life of three or more years, (2) is used in a manufacturing facility in the state to manufacture an item sold as tangible personal property, and (3) is used in the manufacturing process.

You have represented that the equipment run by the computer software would itself qualify for the manufacturing equipment exemption. If the Aunderlying@ equipment is not exempt, any computer software that controls it would be disqualified, also. If the underlying equipment does qualify for the exemption, only two issues remain. The first issue is whether the computer software has an economic life of three or more years. The second is whether the software is deemed Amachinery and equipment@ for purposes of the exemption.

Economic Life. The economic life of the computer software must be at least three years for it to qualify for the exemption. If the life is less than three years, it does not qualify. For property tax purposes, Utah Admin. Code R884-24P-33(E)(1) classifies canned computer software as AShort Life Property,@ property with a life of more than one year and less than four years. The depreciation tables used in this rule assume that canned computer software generally will have a three-year economic life. The useful life of the software in question will be based on all the facts and circumstances and, accordingly, cannot be decided here. We note, however, that if the manufacturer uses a two-year life to depreciate the software for federal tax purposes, the software will not be deemed to have at least a three-year life for sales tax purposes.

Machinery and Equipment. Utah Admin. Code R865-19S-85(A)(3)(b) provides that machinery and equipment, for purposes of the exemption, shall include Aany peripheral device that is essential to a continuous manufacturing process. Qualifying peripheral devices include bits, jigs, molds, or devices that control the operation of machinery and equipment...@ The Commission has previously determined that computer software is a peripheral device and does qualify as Amachinery and equipment@ when it is used exclusively to control the operation of other equipment and machinery in the manufacturing process. From the information you provide, it would appear that the computer software at issue is used exclusively to operate the underlying embroidering equipment. Accordingly, the computer software would qualify as machinery and equipment for purposes of the exemption.

Thus, if the underlying equipment qualifies for the manufacturing equipment exemption, this computer software will also qualify for the exemption if it is depreciated for federal purposes using at least a three-year life. Of course, our opinion is based solely on the representations in your request letter and the limitations expressed herein. The qualification of any particular piece of equipment, machinery or software for exemption depends on the actual facts and circumstances, all of which are subject to review and verification by our auditors.

Please contact us if you have any other questions.

For the Commission,

R. Bruce Johnson

Commissioner

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