Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2013
Sales and Use Tax Annotations
210.0000 DEMONSTRATION, DISPLAY AND USE OF PROPERTY HELD FOR RESALE—General—Regulation 1669
210.0450 Property Used for Demonstration and Other Purposes. A software developer sells a software program to customers most of whom already have the hardware to operate the software program. Occasionally, the developer will sell a complete system which includes hardware and software. The developer does not have a showroom, but potential customers can come to its premises for software demonstrations. In some transactions, the developer will bring the hardware and software to the potential customer's place of business. The developer uses hardware which was acquired ex-tax from out-of-state vendors or under resale certificates to test and refine its software and to demonstrate its software to potential customers. Such usage constitutes taxable use. The issue is whether the developer's liability is measured by the full purchase price of each piece of hardware or by the fair rental value of the hardware for the periods during which it was being used for testing and demonstration of the software.
Unless the developer frequently demonstrates the hardware itself, the measure of tax is the full purchase price of the hardware and not its fair rental value. A taxpayer may be regarded as frequently demonstrating property purchased for resale even though the same use has a dual purpose, e.g., demonstration of the property itself and demonstration of other property (in this case software). Where most of the developer's customers already own the hardware necessary to run the developer's software programs, most of the developer's demonstrations are for the sole purpose of demonstrating the software and not for the purpose of demonstrating the hardware in an effort to make a sale of the hardware. As such, the hardware is not frequently demonstrated and the measure of tax is the full purchase price of each piece of hardware. 9/19/94.