99-041

Response October 5, 2000

 

 

REQUEST LETTER

 

99‑041

 

October 4,1999

 

VIA CERTIFIED MAIL

 

Re: Request for opinion regarding taxability under Title 59, Chapter 12, of the Utah Code Annotated, relating to sales and use tax.

 

Dear NAME;

 

As previously discussed with NAME of your Nexus Division, we respectfully request an opinion regarding the sales and use tax relative to the following factual scenarios:

 

I. Facts

Overview

Our client, a STATE Limited Partnership (ALP@), is a software developer. LP develops software for the sole purpose of licensing the software to other entities (i) in Utah, (ii) outside the state of Utah and within the United States, and (iii) outside of the United States. The software is designed to facilitate individual stock trading on various national stock exchanges ("Trading Software"). Typically the Trading Software is licensed to a broker dealer which then allows broker dealer's customer ("End User") to use the Trading Software in one of two manners. The End User may use the Trading Software on a computer terminal located in the broker dealer's office. Alternatively, the End User may download the software from the broker dealer's website or under certain circumstances from LP's website for use in End User's home or office.

 

LP's offices are in Texas. LP does not have any offices outside of Texas. In addition, LP has no employees other than those located in aid working in Texas, except in the limited circumstances discussed below.

 

License Agreements

The license fee relative to the Trading Software is payable by the broker dealer directly to LP. The license fee is a fixed fee multiplied by the number of times the End User uses the Trading Software to place an order relative to a stock trade. No fee is charged for a canceled order.

 

The Trading Software is licensed pursuant to a software site license entered into between LP and the broker dealer ("Site License"). The Site License typically has a term of one year subject to termination by either party on sixty (60) days notice. The Site License provides that the LP retains ownership of the code for the duration of the Site License and thereafter. Use of the software pursuant to a Site License by an End User must be in the broker dealer's office (i.e., the site) and may not be by or through the Internet.

 

Under certain circumstances, a broker dealer may enter into an amendment to the standard Site License with LP to permit the End User to use the Trading Software through the Internet. If the broker dealer enters into an Internet Amendment with LP then each End User must enter into a Sub-license Agreement ("Sub-license") with respect to the End User's use of the Trading Software. The Sub-license is executed via point and click method on the Internet.

 

The software also possesses the capability to supply charts, graphs and analytics ("Analytic Software") to the individual End User. The license fee relative to the Analytic Software is a fixed monthly charge (i) for each work station provided in the broker dealer's office, payable by the broker dealer directly to LP, and (ii) for each End User of the Analytic Software provided to the End User via the Internet, payable by the End User directly to LP.

 

The Site License Agreement and Internet Amendment (including Sub-license Agreement as Exhibit A to the Internet Amendment) Forms are attached as Exhibits 1 and 2 respectively. It is intended that all of the agreements be enforceable pursuant to the provisions of applicable STATE Law. Any dispute must be determined solely in the State District Court of a specific County in Texas (see Section 9.02 of exhibit 1).

 

Sales, Installation and Technical Support

Software programs developed by LP are advertised in trade publications or will in the future be advertised in trade publications with national circulation, through direct mail and other multi-media campaigns. LP's contact with customers occurs almost exclusively by telephone, mail and Internet from its offices in STATE. Except in limited circumstances, all software is shipped to the customer's location via common carrier, Internet or personally delivered by an unrelated third party installer who is paid by the customer and is not an agent of LP.

 

LP provides technical support services from its STATE office to all broker dealer customers relative to the Trading Software and the Analytic Software. This service is not included in the license agreement as a warranty provision. The technical support services are billed monthly on an hourly basis directly to broker dealer. The LP employee will not be acting in a sales capacity (making sales presentations or taking new orders).

 

Current Tax Treatment

LP is currently charging, collecting and paying over to the State of STATE sales taxes on all of its software licensing, installation services and technical support fees derived from broker dealers or the End Users.

 

II. Questions:

 

Nexus for Sales or Use Tax Derived from the License

 

Trading Software

1. If the LP has no employees in Utah, is sales or use tax due on license fees relative to the

Trading Software pursuant to the Site License if the licensee (broker dealer) is located in Utah?

 

2. If the LP has no employees in Utah, is sales or use tax due on license fees with respect to Trading Software downloaded from a broker dealer's website for use by the End User pursuant to a Sub-license in the End User's home or office, if the Site License relates to the broker dealer's office in Utah?

 

3. If the LP has no employees in Utah, is sales or use tax due on license fees charged to the broker dealer with respect to Trading Software downloaded from LP's website for use by the End User's pursuant to a Sub-license in End User's home or office, if the Site License relates to the broker dealer's office in Utah?

 

4. If a broker dealer's office is in Utah, and the LP has no employees in Utah, does the fact that broker dealer=s customer (i.e., End User) may be located in a state other than broker dealer's office (i.e., broker dealer is providing Trading Software to End User's by the Internet pursuant to an Internet Amendment and Sub-license) make a difference?

 

Analytic Software

5. If the broker dealer is located in Utah, and the LP has no employees in Utah, is sales or use tax due on the monthly fixed dollar license fee paid directly by the End User to LP for use of

the Analytic Software, if the End User is located outside of Utah?

 

6. If the End User's located in Utah, and the LP has no employees in Utah, is sales or use tax due on the monthly fixed dollar license fee paid directly by the broker dealer to LP on behalf of the End User for use of the Analytic Software, if the broker dealer is located outside of Utah?

 

Nexus for Sales and Use Tax Derived from Technical Support

7. Will sales or use tax be due on separately stated technical support fees charged pursuant to the Site License if the licensee (broker dealer) is located in Utah, but the work is performed via telephone or Internet by an LP employee based in STATE?

 

Nexus for Sales and Use Tax Derived from Installation

8. Will sales or use tax be due on separately stated fees relative to the installation of the Trading Software on a licensee's (broker dealer's) computer hardware under a Site License if the

licensee (broker dealer) is located in Utah and the work is performed via telephone Or the

Internet by an LP employee based in STATE?

 

9. Will sales or use tax be due on installation performed in Utah under a Site License by an unrelated third party, approved by LP but hired and paid by the licensee?

 

Nexus for sales and Use Tax Derived from Physical Presence in Utah

10. In regards to Questions 1 through 9 above, will any answer change (i.e., sales or use tax

found to be due) if an LP employee based in STATE, with no authority to propose or negotiate

sales:

 

a. Occasionally travels to Utah to provide technical support services for a licence (broker dealer) located in Utah pursuant to the Site License?

 

b. Frequently travels to Utah to provide technical support services for a licensee (broker dealer) located in Utah pursuant to the Site License?

 

11. In regards to Questions 1 through 9 above, will any answer change (i.e., sales and use tax found to be due) if an LP employee based in STATE with no authority to propose or negotiate

sales:

 

a. Occasionally travels to Utah to install Trading Software on a licensee's (broker dealer) computer hardware under a Site License?

 

b. Frequently travels to Utah to install Trading Software on a licensee's (broker dealer)

computer hardware under a Site License?

 

12. In regards to Questions 1 through 9 above, will any answer change (i.e., sales or use tax

found to be due) if an LP employee:

 

a. Occasionally travels to Utah to solicit customers (sales calls, proposals, etc.) or take

sales orders?

 

b. Frequently travels to Utah to solicit customers (sales calls, proposals, etc.) or take sales orders?

 

Administration where Sales and Use Tax Liability Exists

 

13. If sales tax liability exists, what are the registration and filing requirements?

 

14. If sales tax liability does not exist, does LP have any responsibility to collect the use tax on its transactions in Utah?

 

a. If so, what are the registration and filing requirements?

 

b. If no responsibility for collecting use tax exists, can the LP choose to collect the use tax on behalf of the broker dealer or End User?

 

15. If LP is determined to owe sales or use tax due to its operations in Utah, can LP voluntarily disclose its failure to register, pay any taxes due and receive a waiver for late lees, penalties, and/or interest under an amnesty program?

 

We respectfully request your response to the above questions. If you have any questions

regarding the factual scenarios or to the questions stated above, please do not hesitate to give us a

call. Thank you in advance for you assistance.

 

Very truly yours,

NAME

 

 

RESPONSE LETTER

 

October 5, 2000

 

RE: Nexus Issues Relating to Texas Limited Partnership=s Licensing Computer Software

 

Dear NAME,

 

You have requested an advisory opinion regarding the Utah sales and use tax liability of a Texas Limited Partnership (ALP@) that develops and licenses computer software to entities in Utah. Before answering your specific questions, let us first address Utah=s laws and policies concerning computer software and sales and use tax nexus.

 

Computer Software. LP will be licensing two computer software programs, referred to as the Trading Software and the Analytic Software, to multiple licensees, which will be installed on the Licensee=s hardware either Afrom network or disk provided@ by LP (Article 2.02(b) of the provided Exhibit 1 contract). These computer software programs have not been prepared at the special request of a purchaser to meet its particular needs, but are licensed to multiple licensees. Accordingly, they are deemed Acanned computer software@ for Utah taxation purposes. Utah Admin. Rule R865-19S-92(A)(1) (ARule 92"). Section (A)(5) of Rule 92 further provides that Atangible personal property@ includes canned computer software.

 

Sales and Use Tax Nexus. Utah Code Ann. '59-12-107(1)(a)(v) provides that a vendor has nexus with Utah for sales and use tax purposes if it regularly engages in any activity in connection with the leasing or servicing of property located in Utah. Your exhibits and letter indicate that LP will be licensing canned computer software to its Utah customers, retaining ownership rights to that canned computer software, and providing service on the software. Accordingly, Utah law would impose sales and use tax nexus upon LP because of its ownership and leasing of tangible personal property in Utah.

 

Nevertheless, we must also examine whether LP=s activities create sales and use tax nexus with Utah under the Commerce Clause. As stated above, LP will own tangible personal property in Utah, i.e., the canned computer software that is licensed to its Utah customers, with ownership or title remaining in LP. LP will also be servicing the software located in Utah or providing technical support services to its customers in Utah, most likely by telephone or the Internet. In Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the United States Supreme Court commented that Quill licensed its computer software program to a few of its North Dakota mail-order customers, enabling those customers to check current inventories and prices and place orders directly. Quill retained title to this software. However, the Court noted that while the presence of this software in North Dakota constituted some minimal physical presence, Quill=s software licensing activity and the presence of the software did not meet the Asubstantial nexus@ test required to satisfy the Commerce Clause.

 

However, had Quill=s small amount of software licensing been more extensive, the Court may have reached a different conclusion. LP=s main activity in Utah will be the licensing of computer software, a regular and systematic business practice intended to establish and maintain a market in Utah for this computer software and its electronic services of facilitating individual stock trading. Accordingly, LP=s main economic activity in Utah results in and necessitates its physical presence in Utah, a presence that is purposeful and necessary. In addition, there is no indication that LP=s physical presence in Utah will be de minimis; i.e., where LP would only license a very limited number of computer software programs in Utah. For these reasons, LP=s physical presence in Utah will constitute a substantial presence in the State, and LP will have nexus with Utah for sales and use tax purposes because of these activities.

 

Questions Posed In Request Letter. LP will be licensing its computer software directly to broker dealers or indirectly through sub-licenses to customers of these broker dealers (AEnd Users@). Any sub-license to an End User is assumed to be a separate transaction, not a Aresale@ of the license purchased by the broker dealer. As a result, LP is liable for Utah sales tax on all license or sub-license fees relative to its Trading Software or Analytic Software when that software is licensed to a Utah broker dealer or sub-licensed to a Utah End User. However, LP is not liable for Utah sales tax on licenses with non-Utah broker dealers or sub-licenses with non-Utah End Users. Accordingly, LP is liable for Utah sales tax under the circumstances listed in Questions #1, #2, #3, #5, and #6 of your letter, but it is not liable for Utah sales tax under the circumstances listed in Question #4. We may also point out that a sub-license to a Utah End User through a non-Utah broker dealer would also result in Utah sales tax liability for LP on the sub-license fees.

 

In Question #7, you ask if sales and use tax is due on fees charged to Utah customers for technical support, when those fees are separately stated. Utah Code Ann. '59-12-103(1)(g) provides that services to repair or renovate tangible personal property are subject to sales tax. Accordingly, any fees charged by LP to repair the canned computer software or renovate it, including fees associated with providing updated software, are taxable fees. On the other hand, answering technical questions on the use of the software via telephone or Internet would constitute nontaxable services as long as LP does not adjust or service the software in connection with the call or Internet. If LP separately states its fees for nontaxable services, it has no tax liability regarding these fees. However, if nontaxable and taxable fees are combined for billing purposes, the entire amount is taxable.

 

In Questions #8 and #9, you ask whether installation fees associated with LP=s computer software are taxable. Section 59-12-103(1)(g) provides that services to install tangible personal property in connection with other tangible personal property are taxable. The computer software licensed by LP is tangible personal property. When fees are charged to install that software to computer hardware, which is also tangible personal property, those fees are taxable if the service is to Ainstall@ that software.

 

AInstall,@ for purposes of Section 103(1)(g), is not specifically defined by the Legislature. However, Webster=s II Dictionary (1988) defines Ainstall@ as Ato set in position or adjust for use.@ When computer software is Ainstalled@ onto computer hardware, an act occurs where the software is transferred from one state or one location onto the computer hardware in another state or other location. This act sets the software in position on the computer hardware or adjusts the software for use on the computer hardware. Accordingly, the service of installing canned computer software in computer hardware is a taxable service, even if it is stated separately.[1]

 

Thus, LP would need to charge and collect sales tax on its installation fees. Should an unrelated third party contract with LP=s customer to install the software, the third party installer would need to charge and collect sales tax on its installation fees. We point out that the installation service is differentiated from those services deemed nontaxable in Section (D) of Rule 92. Section (D) clarifies that services to modify or adapt canned computer software to a purchaser=s needs or equipment are not taxable if the charges are separately stated and identified.

 

Questions #10, 11, and 12 ask whether LP would be subject to sales and use tax nexus with Utah under a number of situations in which LP=s employees would travel to and perform activities in Utah. We determined above that LP has sales and use tax nexus with Utah because of: 1) ownership of tangible personal property in Utah; and 2) the conducting of a regular and systematic business in Utah to establish and maintain a market for that computer software. Accordingly, sales and use tax nexus with Utah exists whether or not LP engages in these additional activities in Utah.

 

Question #13. As an entity with sales and use tax nexus with Utah, LP will need to register with the Tax Commission and obtain a tax account. Form TC-69 is enclosed for LP to complete and return to the Commission to obtain this account.

 

Question #14 assumes that LP does not have sales tax nexus with Utah. As we have determined that it does, LP will be filing regular sales tax reports with Utah, on which any use tax liability should also be reported.

 

As to Question #15, the Tax Commission has a Voluntary Disclosure Program, through which companies may anonymously approach the program staff to seek resolution of Utah tax liabilities arising from past activities. However, the program is not available to vendors who have been contacted first by the Tax Commission. Should you wish to inquire further about the program, please contact NAME at #####.

 

Though you have not inquired specifically about Utah property tax obligations, we take this opportunity to inform you that Utah imposes property taxes upon tangible personal property located in Utah, which includes canned computer software. If you have any other questions, please contact us.

 

For the Commission,

 

Marc B. Johnson

Commissioner

 


[1] In Ogden Union Ry. & Depot v. State Tax Comm., 395 P.2d 57, the Utah Supreme Court determined that Ainstall@ did not include stenciling identification on baggage trucks and benches, for to conclude otherwise would be an Aabdication from lexicography@ (one a taxpayer would fail to understand). It also found that Ainstall@ did not include removing and replacing inner grain doors into freight cars prior to grain shipments. The Court stated that to hold otherwise would distort the common meaning of the term Ainstall@ because nothing had been added. These holdings support our conclusion that the act of installing computer software onto computer hardware is a taxable service under Section 103(1)(g) because it is common usage to call this service an installation and because something is indeed added to the computer hardware.