Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2013
 

Sales and Use Tax Annotations


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A

120.0000 AUTOMATIC DATA PROCESSING SERVICES AND EQUIPMENT—Regulation 1502

Annotation 120.0410

(a) IN GENERAL

120.0410 Program Error Corrections. A taxpayer designs and sells software programs. It also sells a lump-sum optional maintenance contract that offers customers telephone support, plus software updates and enhancements. The taxpayer discovers errors in a software program and issues error corrections on diskettes to all of its software purchasers including those who had not purchased a maintenance contract. On the basis that all software purchasers receive corrections, the taxpayer contends that the maintenance contracts are entirely for services not subject to tax.

Even though the taxpayer gratuitously provides error corrections to its customers who do not purchase maintenance contracts, the taxpayer's maintenance contracts are not "solely consultation services." The taxpayer charges the maintenance-contract customers a lump-sum amount for a maintenance contract that offers all updates, enhancements, and technical support. Also, the taxpayer transfers all program error corrections to all software purchasers by diskettes. When there is a taxable transfer of tangible personal property, the tax applies to the gross receipts including all services that are part of the sale, with only those deductions allowed by statute. Accordingly, the lump sum amount charged for the maintenance contracts is fully taxable, even though a portion of the charge is for consultation services. This is because the consultation services are a mandatory part of the maintenance contract under which the taxpayer sells tangible personal property since the customers do not have the opportunity to purchase the consulting services separately from the purchases of the updates or enhancements. 4/19/94. (Am. 2004–2).

(Note: Regulation 1502 was amended so that beginning January 1, 2003, 50 percent of the charge for optional software maintenance agreements is subject to tax. Prior to that date, generally 100 percent of the charge was subject to tax.)