Sales, Use and International Tax Activity Update - July 2009

Streamline Sales Tax Compliance Weighs in on Software Licenses

An Interpretative Opinion recommendation was rendered by Streamline Sale Tax (SST) Compliance Review and Interpretations Committee (CRIC) concerning additional prewritten computer software licenses. The CRIC concluded the additional license to use the software should be treated the same as the original purchase of the software license.

Background

The fact pattern presented involves a purchaser acquiring prewritten computer software under a license that limits its ability to use the software in one of three ways:

1. The license only permits the purchaser to make a set number of copies
2. The license only permits a set number of users to use the software concurrently or
3. The license only permits the purchaser to load the software onto a computer with a specified computing power.

If the purchaser wants to make additional copies of the software, allow additional users to use the software concurrently, or to migrate the software to more powerful computer, it must upgrade the license and pay an additional license fee. Once the fee is paid, the seller provides the purchaser by telephone with an alphanumeric code which, when entered into the computer, permits the making of additional copies of the software, permits additional concurrent users, or causes the software to function on the more powerful machine. The seller delivers no additional software to the purchaser.

Issue

The issue presented is whether a software license upgrade (as opposed to an upgrade of the software itself) constitutes tangible personal property or computer software where the only thing delivered to the purchaser is an alphanumeric code. The requester proposes that an interpretation be made that a software license upgrade does not constitute tangible personal property or computer software where the only thing delivered to the purchaser is an alphanumeric code.

Opinion

The SST Agreement defines tangible personal property as personal property that can be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses and includes electricity, water, gas, steam, and prewritten computer software. Although no physical software or other tangible personal property is distributed in the fact pattern, the additional license to use the software is the essence of the transaction, not the alphanumeric code. The alphanumeric code merely facilitates the additional use of the software. The additional license to use the software should be treated the same as the original purchase of the software license.

This Interpretative Opinion may be viewed at the Streamlined Sales Tax Governing Board website.

(SST Governing Board Meeting, Arlington, Virginia, May 12, 2009)

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