Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2016
Sales and Use Tax Annotations
120.0000 AUTOMATIC DATA PROCESSING SERVICES AND EQUIPMENT—Regulation 1502
(a) IN GENERAL
120.0514 Sale of Software and Maintenance Contracts. An out-of-state taxpayer provides data processing and consulting services to banks, mortgage companies and credit unions in the origination, secondary marketing and servicing of single family mortgage loans. The taxpayer also sells software (prewritten) licenses to clients who prefer to do their own processing. The client has the choice of receiving the programs on tapes or to have them transferred by remote telecommunication. In conjunction with the sale of software the clients have the option of receiving updates of the software and telephone support under a support agreement. The clients are sent a tape with the changes each month. The tape contains a program activity report that lists the modules that are being changed that particular month. The client also receives a memorandum (on paper) which highlights some of the changes for the month. Fees charged to the clients are combined (referred to as bundled billing) into one amount and billed monthly. Some of the old contracts allow the separate billing of enhancements and telephone support. The enhancement/telephone support billing is a totally separate fee from the license fee. The taxpayer is looking into transferring these monthly updates and memorandums by remote telecommunications to its clients.
The sale of prewritten computer programs furnished on storage media constitutes a sale of tangible personal property that is subject to sales or use tax. The measure of tax includes all amounts charged by the seller for the sale of the software, including all licenses and other end user fees. (Regulation 1502(f)(1)(B).)
The sale of a software maintenance contract (updates and error correction provided on storage media, such as tapes) is also a sale of tangible personal property, and it is therefore subject to sales or use tax. (Regulation 1502(f)(1)(C).) The charges for services such as telephone support are taxable as part of the sale of that maintenance agreement unless such services are optional and the customer may contract for those services for a separately stated price. (Regulation 1502(f)(1)(C).) The services are optional only if the customer may purchase the maintenance contract without purchasing the service.
Tax does not apply where the only transfers to the customer are by remote telecommunication from the seller's computer to the customer's computer and the customer does not obtain possession of any tangible personal property in the transaction. If the transfer of a prewritten program is a nontaxable transaction, then the seller is the consumer of tangible personal property used to produce written documentation or manuals that are transferred to the customer for no additional charge. If a separate charge is made for the documentation or manuals, then tax applies to the separate charge. 11/3/95. (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.)