Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2017

Sales and Use Tax Annotations

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Annotation 515.0725


515.0725 Software Prototypes. A computer consulting business also creates custom software. It is contemplating a contract to develop and install a system in a foreign country for a foreign entity. A prototype will be fabricated and assembled in this state to serve as a model or a "test-bed" for the larger system which will be assembled and developed in the foreign country. The prototype will be used to perform such tasks as hardware and software integration and system problem correction. On completion of the contract, the prototype will be shipped to the customer. Title to the prototype will transfer to the customer upon delivery to the common carrier for shipment.

The prototype is clearly "tangible personal property" as defined in section 6016. The use of the prototype in this state to integrate hardware and software and to correct system problems is other than for demonstration and display for the purpose of resale. The sale to the computer consulting business of the materials and labor to fabricate or assemble the prototype is a taxable retail sale. The sale to the customer is a second retail sale, but that sale will be exempt from tax if meeting the requirements of subdivision (a)(3) of Regulation 1620. 5/3/93.