Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2014
Sales and Use Tax Annotations
120.0000 AUTOMATIC DATA PROCESSING SERVICES AND EQUIPMENT—Regulation 1502
(a) IN GENERAL
120.0552 Software Licensing. A software products company markets a comprehensive mechanical computer aided engineering software system. The program, which is licensed, is an application program that permits a computer to perform specific tasks. The engineering technology is transferred to the end user on magnetic tape. The end user/customer signs one Master License Agreement.
Additional software may be ordered by executing a supplemental Licensed Software Designation Agreement. The customer can obtain either an annual license or perpetual (an extended term) license.
When a customer obtains a perpetual license, they will frequently also obtain optional maintenance and support services. These services entitle the end user to receive services including:
(1) updates and extensions on amendments of user documentation (manuals),
(2) new versions of licensed programs which encompass improvements, extensions and other changes, and
(3) corrections to user documentation and/or program codes.
The transactions in question are:
(1) The customer obtains a perpetual license for two simultaneous users. Eight months later, the customer executes a new Agreement to expand to four simultaneous users. No additional tapes or manuals will be sent to the customer, but the customer is charged a fee for the addition of the two simultaneous users.
(2) The customer obtains a perpetual license for a drafting module. After three months, the customer adds the solid modeling module that is embodied on the same magnetic media as the drafting module. No additional tapes are sent to the customer. An additional manual is sent and a fee is charged for the additional module.
(3) The customer has obtained an annual license for a module and renews for an additional year. No additional tapes or manuals are sent to the customer, but an annual license fee is charged. The customer claims that additional charges are nontaxable because no additional tangible personal property was transferred.
The regulation provides that charges are nontaxable when the purchaser does not obtain possession of any tangible personal property. Under the facts provided, possession of tangible personal property was transferred and a charge was made for the customer's increased use of the property. The fees in each of the described situations are subject to tax. 1/6/92. (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.)