Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2017
Sales and Use Tax Annotations
120.0000 AUTOMATIC DATA PROCESSING SERVICES AND EQUIPMENT—Regulation 1502
(a) IN GENERAL
120.0560.825 Software Support Agreement. A taxpayer sells software packages and software support agreements. Customers may choose one of the following support agreement options: full support or after-hours support. Full support includes telephone hotline support as well as software upgrades released during the maintenance period. The taxpayer charges one price for this full support. There is no segregation of price between the hotline and the upgrades. When an upgrade is released, the customers receive a software upgrade tape that they load onto their computer system. The taxpayer's employee then dials into the customer's system via modem and performs the procedures to actually install the new upgrade. The other option, after-hours support, basically consists of telephone hotline support. The customers who choose this option are not entitled to any software upgrades. A customer initially purchasing a software package is required to purchase one of the maintenance options for the first year. After the first year, the support agreement becomes optional. If a customer elects to discontinue the support, the customer cannot receive any future software upgrades unless all back support charges are paid.
Since the customers are required to purchase one of the maintenance alternatives for the first year, whichever support contract the customer selects is mandatory. Thus, the taxpayer's charges for all first-year support agreements are taxable. Even after the first year, all the taxpayer's charges for full support are taxable, even if that support is truly optional since the customer cannot purchase the software portion without also purchasing the services. The taxpayer may not deduct its charges for the services even if separately stated.
After the first year, when the maintenance contracts are optional, the taxpayer's charges for its after hours support are not taxable if they consist entirely of telephone support. When a customer who had discontinued support pays "back support charges" as a condition to obtaining a software upgrade, such charges are part of the sale of the upgrade and are subject to tax. 4/15/96.
(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.)