99-046
Response April 26, 2000
REQUEST LETTER
Monday, July 19 1999
Dear Commissioners:
COMPANY would like to request an advisory opinion to clarify the taxable status of software sold in the state of Utah pursuant to Utah Code Ann. 59‑12‑103 and Administrative Rule R865‑19‑92S.
COMPANY is a value‑added reseller (VAR) that sells accounting related software and services to businesses in Utah and surrounding states. The software sold consists of what we have determined to be Acanned@ software under the definition provided, and also Acustom@ software under the same set of definitions. Services provided include consulting services for planning, installation, setup, on‑site training, data conversation, classroom training, software customization, with maintenance and support plans.
Under the rule (R865‑19‑92S), "canned" software is that software sold without modification that can be used by a variety of users "out of the box." Examples of this software are common word‑processing and spreadsheet programs that we all use daily. We understand this software is subject to sales tax.
Our question requiring clarification pertains to the "custom" software definition. The software in question, SOFTWARE, is based upon a relational database with accounting functions attached. This provides a set of preexisting routines that allows a competent, certified development professional to customize the software to meet the demands of different businesses. These businesses have varied accounting methods and business rules that must be accommodated in the customization, planning, installation and training phases of software implementation. To this point, no two implementations have been the same, and virtually all of the businesses who have purchased the software have required that it be modified to meet their requirements. In most cases, this requires changes to the basic input, processing and reporting routines of the software to accomplish the goals given us by the business owner. In our opinion, this software should be classed as "custom" and should be exempt form sales tax under the aforementioned definition. We request and advisory opinion to clarify this definition as clearly as possible.
Thank you for your time in this matter.
Sincerely;
NAME
RESPONSE LETTER
April 26, 2000
NAME
COMPANY
Re: Advisory Opinion 99-046, sales tax on computer software
Dear NAME,
The Tax Commission has received your request for information pertaining to the application of sales or use tax on sales of computer software by your client to its customers in Utah. We offer the following tax guidance:
From the facts presented in your letter, your client markets a product called SOFTWARE. The SOFTWARE consists of preexisting (or Acanned@) routines that are adapted for use by individual customers. Your question is whether the adaptations qualify the modified software for a sales tax exemption as Acustom@ software.
The software in question is, to some degree, prewritten without a particular customer in mind. As such, it is, at least prior to modification, Acanned@ software. As a general threshold, adding the customer=s name or other superficial adaptations is not enough to qualify the software as custom software. Nor does merely bundling several prewritten software components together into a set for a particular customer change the software=s character from Acanned@ to Acustom@ software. The adaptations must be sufficient to change the functional operation of the software.
We do not have before us facts upon which we can determine with certainty that sales of SOFTWARE is, in every case, non-taxable as sales of Acustom@ software. In fact, that determination may vary from one sale to the next, depending upon the significance of the modifications. In general, the software will be viewed as Acustom@ software only so long as the modifications surpass the minimum threshold as described.
Whether charges for installation, upgrades, maintenance and support are taxable depends upon whether the software qualifies as Acanned@ or Acustom.@ These charges are taxable if they are associated with Acanned@ software. They are nontaxable if associated with Acustom@ software and if separately stated and identified on the customer=s invoice.
Please let us know if you have additional questions.
For the Commission,
Marc B. Johnson
Commissioner
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