Sales Tax Articles
Sales Tax State Activity Update - August 2008
Missouri Solidifies the Taxability of Tangible Software
Canned software license fees, and mandatory maintenance agreements and management fees as well as custom modifications are subject to tax.
Background
The taxpayer licenses canned software and provides software related services to its financial advisory customers. The taxpayer installs the software at its customer's site. The software license agreement not only applies to the software but also the related maintenance services. The maintenance services include updates, upgrades, and fixes to the current version of the software.
The taxpayer also provides a management agreement which includes professional services such as consulting, integration, implementation, installation, temporary workarounds, modifications, enhancements or improvements, training, and training materials. With the management agreement, the taxpayer provides custom modifications to the canned software in order for the software to interact with the customer's software environment.
The software modifications include creating needed queries, creating import and export files, developing a process to populate certain fields in the core system, creating processes to include or exclude certain types of customers or transactions within the system, developing decision plans based on the customer status or limits, modifying reports, creating automated processes to query the customer's database for potential customers and transactions to include in the software process, defining various transactions to be included in the software process, and creating core system update processes.
The taxpayer's clients must purchase all of the aforementioned services with the software license. The individual services are not itemized in the contract and a lump sum is charged.
Ruling
Regulation 12 CSR 10-109.050(1) provides that "the sale of canned computer software programs is taxable as the sale of tangible personal property." Subpart 12 CSR 10-109.050(2)(A) provides, that "a program may be a canned program even if it requires some modification, adaptation or testing to meet the customer's particular needs.
"Subpart 12 CSR 10-109.050(1)(3)(C) provides that "programming changes to a canned program to adapt it to a customer's equipment or business processes, including translating a program to a language compatible with a customer's equipment, are in the nature of fabrication or production labor that are a part of the sale and are taxable."
Pursuant to this regulation, the sales of a software license and management agreements are taxable notwithstanding the custom modifications. Regulation 12 CSR 10-109.050(3)(F) provides that program installation, training and maintenance of software services are exempt if they are not mandatory.
The full ruling can be accessed on the Missouri Department of Revenue Web site.
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