Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2015

Sales and Use Tax Annotations

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Annotation 120.0563


120.0563 Source Code Transfers. A firm encodes its computer program on a master (ROM BIUS) chip, and transfers the chip together with the right to reproduce identical copies of the chip to its customer. For each chip copied the licensee pays a royalty.

In certain situations, the firm also furnishes human readable source code. The source code and other source materials allow the customer to modify the master chip's object code before reproducing the chip. The firm makes a one time flat fee for the license of the source code and restricts the licensee from selling, licensing, sublicensing, disclosing, or providing access to the source material.

The exclusion from tax contained in Regulation 1502(f)(1)(B) embraces both the source code version and the object code version. The licensee who receives the source code and other source materials acquires the information incidental to the licensing transaction. As long as the licensee acquires the right to reproduce and distribute copies of the program in object code format, and does not acquire a site license for the object code, it makes no difference that the licensee does not have a similar right with respect to the source code. 9/30/88.