Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2017
Sales and Use Tax Annotations
565.0000 UNITED STATES CONTRACTORS
(e) TITLE-PASSAGE CLAUSES
565.1325 License of Canned Software. A U.S. government contractor obtains a license for canned software from a vendor for its own use on a U.S. government contract that contains a title passage clause. The license is for a one year period with an obligation to return the software and any copies at the termination of the one year period. Thus, it is a lease of software rather than a purchase. The contractor will not sublicense the program to the government but rather uses it to evaluate certain criteria.
Under the court case of United States v. SBE, (9th cir., 1982) 683 F. 2d 316 leases to government contractors are not exempt from tax even though the contractor uses the leased property to perform a contract with the United States and will be reimbursed for the cost of the lease by the United States. The incidence of the tax is on the lessee (the contractor in this case). The lessee's passing of such cost on to the United States does not make the lease one to the United States. The charges to the contractor for the software are subject to the use tax which must be collected by the lessor. 6/22/95.
(For application of tax to purchased software, see Annotation 565.1190.)