Sales Tax Articles
Sales Tax State Activity Update - February 2006
Utah Explores Two...Two...Two Software Services in One
The Taxpayer licenses its principal information systems software from a software developer (SD) located outside the State. In accordance with the original contract, the Taxpayer pays an annual licensing/maintenance fee for continued use of the software. This fee entitles the Taxpayer to software upgrades, when available, error corrections, and the use of the software. The SD has historically treated its software as canned software, and continues to presume that this treatment is correct. Accordingly, SD has collected sales tax on all license fees from the Taxpayer.
In addition, the Taxpayer has entered into separate consultation agreements wherein employees of SD perform additional consultation services on behalf of the Taxpayer. The two separate consultation agreements for which the Taxpayer requests guidance are as follows:
1. SD employees are occasionally engaged to travel to the Taxpayer premises to assist in implementing and customizing the software on the servers. Terms of this agreement are separately negotiated from the original software licensing agreement.
2. The Taxpayer participates in a "best practices" group with other participating SD customers. Under this arrangement, all participants shared their results and best practices with the SD. The SD employees travel to the Taxpayer's premises to meet with Taxpayer employees, compare the Taxpayer's practices with the best practices of other participants, and assist the Taxpayer in implementing certain best practices. The essence of this service was education and consultation, and did not entail any modification, implementation or customization of the software.
Issue
Is either of the two consultation charges summarized above subject to Utah sales tax?
Ruling
With respect to the first agreement, and in the absence of additional information, it appears the SD may be providing two separate and distinct services. The service to "implement" the software appears to be a taxable transaction. The second service is for customizing the software is not taxable. The specific customization services must be separately stated and identified on the invoice. Otherwise, they would be subject to tax as part of the entire transaction.
View the full text on the Utah State Tax Commission Website.
(Private Letter Ruling, Opinion No. 04-008, Utah State Tax commission, 12/02/05)
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