LR5753

July 16, 2009

Dear Applicant:

This is a letter ruling issued by the Director of Revenue under Section 536.021.10, RSMo, and Missouri Code of State Regulations 12 CSR 10-1.020 in response to your letter of May 14, 2009.

The facts you presented in your letter ruling request and additional documentation and information provided to Legal Counsel Stephen P. Sullivan are as follows:

Applicant is an out-of-state corporation that sells software systems to automate the trading process for sell-side equity firms engaged in securities transactions. Applicant hosts the software application in Applicant’s data centers and provides the software to the client as a managed service. Before implementing the software system, the Applicant and customer determine the configurations that will enable the software to function as the customer requires.

Applicant next sets up dedicated communications from the customer’s location to the Applicant’s data centers outside of Missouri in order to provide access to the software on the data center servers. Applicant leases a dedicated line from a telecommunications service provider in order to provide its customer with a T1 connection to the servers. Applicant then bills its customer for a monthly managed access fee for this communications service.

The hosted software system is installed remotely. Applicant establishes servers in its data centers that its customer may access via the dedicated telecommunications lines. A component of the software system is installed on the customer’s desktop PCs. This component of the software is installed by Applicant’s engineer who uploads the software to the client over the dedicated telecommunication lines from the servers in the data center onto the customer’s desktop PCs.

Applicant supplies the customer with certain necessary equipment, such as routers, to be used at the customer’s site. The equipment is not sold or leased to the customer. Applicant retains ownership of the equipment. The customer is required to return the equipment when it terminates the service.

Billing for the hosted software system includes a one-time deployment fee, a monthly service charge (software charge and basic service and support are included in this charge), a monthly managed access fee for the communications service, and pass-through market data fees that are based on the number of users and generally are pass-through subscription fees for the charges from financial markets for their data with a mark up imposed by Applicant. The package may include optional interface, connectivity, or support charges if additional services are desired by Applicant’s customer.

Applicant also provides the entire software package through a more traditional software license. In this package, the software is installed onto computers and servers owned by the customer. Installation of the complete package is through a “load and leave” method: the software package is directly installed on the customer’s computer system by Applicant’s employees without providing the software to the customer in a tangible format. Customers purchasing software through the “load and leave” transaction do not incur the same monthly charges as customers under the hosted software arrangement.

ISSUE 1:

Is Applicant’s sale of the hosted software subject to sales or use tax if Applicant does not provide its customer with a tangible format of any component of the hosted software?

RESPONSE 1:

No. Applicant’s sale of the hosted software is not subject to sales or use tax if Applicant does not provide its customer with a tangible format of any component of the hosted software.

Section 144.020.1, RSMo, imposes a sales tax “upon all sellers for the privilege of engaging in the business of selling tangible personal property or rendering taxable service at retail in this state.” Section 144.610.1, RSMo, imposes a use tax “for the privilege of storing, using or consuming within this state any article of tangible personal property[.]”

12 CSR 10-109.050(3)(A) provides:

Tax applies to the sale of canned programs delivered in a tangible medium which are transferred to and retained by the purchaser. Examples of canned programs delivered in a tangible medium would include coding sheets, cards, magnetic tape, CD-ROM or other tangible electronic distribution media on which or into which canned programs have been coded, punched or otherwise recorded.

12 CSR 10-109.050(2)(A) defines canned programs as follows:

Canned programs are standardized programs purchased “off the shelf” or are programs of general application developed for sale to and use by many different customers with little or no modifications. These may include programs developed for in-house use and subsequently held or offered for sale or lease. A program may be a canned program even if it requires some modification, adaptation or testing to meet the customer’s particular needs.

12 CSR 10-109.050(3)(C) provides:

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.

Applicant is selling a canned software program, which is subject to sales or use tax if it is sold in a tangible format. If Applicant does not transfer or provide the canned software program in a tangible medium, however, there is no sale of tangible personal property under Section 144.020, RSMo. Therefore, Applicant’s sale of hosted software is not subject to sales or use tax.

ISSUE 2:

Is Applicant’s monthly managed access fee for the communications connection to Applicant’s data centers subject to sales or use tax?

RESPONSE 2:

Yes. Applicant’s monthly managed access fee for the communications connection to Applicant’s data centers is subject to sales tax.

Section 144.020.1(4), RSMo, imposes a sales tax on the following:

[A]ll sales of local and long distance telecommunications service to telecommunications subscribers and to others through equipment of telecommunications subscribers for the transmission of messages and conversations and upon the sale, rental or leasing of all equipment or services pertaining or incidental thereto; except that…any amounts paid for access to the Internet…shall not be considered as amounts paid for telecommunications services[.]

Section 144.010(13), RSMo, defines telecommunications service for purposes of Chapter 144 as follows:

[T]he transmission of information by wire, radio, optical cable, coaxial cable, electronic impulses, or other similar means. As used in this definition, "information" means knowledge or intelligence represented by any form of writing, signs, signals, pictures, sounds, or any other symbols.

Providing the communications connection from Applicant’s servers to the customer’s location in Missouri meets the definition of a telecommunications service. Consequently, Applicant’s monthly managed access fee is subject to sales tax because it is a charge for the taxable sale of telecommunications service under Section 144.020.1(4), RSMo.

ISSUE 3:

Is Applicant required to pay sales or use tax on the routers and other equipment that Applicant provides to its Missouri customer to provide the customer with the hosted software?

RESPONSE 3:

Yes. Applicant is required to pay sales or use tax on the routers and other equipment that Applicant provides to its Missouri customer to provide the customer with the hosted software.

Section 144.020.1, RSMo, imposes a sales tax “upon all sellers for the privilege of engaging in the business of selling tangible personal property or rendering taxable service at retail in this state.” Section 144.610.1, RSMo, imposes a use tax “for the privilege of storing, using or consuming within this state any article of tangible personal property[.]”

Missouri Code of State Regulations 12 CSR 10-113.200(1), provides, “A sale of tangible personal property is subject to sales tax if title to or ownership of the property transfers in Missouri …. If a sale is not subject to Missouri sales tax but the property is stored, used or consumed in Missouri, the transaction is subject to use tax.”

Applicant does not sell or lease the routers or other equipment to its customer. Applicant retains title to the routers and other equipment and they must be returned to Applicant when the contract for the hosted software terminates. Consequently, Applicant is using the equipment in Missouri to provide the hosted software to its Missouri customer. Applicant should pay sales tax on the equipment if Applicant purchases the equipment from a Missouri vendor. Applicant should pay use tax on the equipment if Applicant purchases the equipment from a non-Missouri vendor.

ISSUE 4:

Are Applicant’s mandatory charges for deployment and support services subject to sales or use tax when sold as part of the initial sale of the hosted software?

RESPONSE 4:

No. Applicant’s mandatory charges for deployment and support services are not subject to sales or use tax when sold as part of the initial sale of the hosted software. See Response 1.

ISSUE 5:

Are Applicant’s pass-through market data fees and various optional charges subject to sales or use tax when sold as part of the initial sale of the hosted software?

RESPONSE 5:

No. Applicant’s charges for additional support services, market data fees, and pass-through market charges are not subject to sales or use tax when sold as part of the initial sale of the hosted software. See Response 1.

ISSUE 6:

Is Applicant’s sale of software subject to sales or use tax if Applicant installs the software on its customer’s computer system by means of a “load and leave” transaction in which no tangible format of the software is left with the customer?

RESPONSE 6:

Yes. Applicant’s sale of software is subject to sales tax if Applicant installs the software on its customer’s computer system by means of a “load and leave” transaction in which no tangible format of the software is left with the customer. To the extent that Applicant also imposes mandatory service charges (e.g., deployment charges) in a “load and leave” transaction, the mandatory service charges will be subject to sales tax.

Section 144.020.1, RSMo, imposes a sales tax “upon all sellers for the privilege of engaging in the business of selling tangible personal property or rendering taxable service at retail in this state.”

In Kansas City Power & Light Co. v. Director of Revenue, 83 S.W.3d 548 (Mo. banc 2002), the Supreme Court of Missouri construed “sale at retail” to embrace a transaction in which the customer receives the right to use, store, or consume the property.

Here, delivery is made to the customer by use of a tangible storage media. The customer controls the use of the tangible storage media. Therefore, Applicant’s sale of software through “load and leave” transactions is subject to sales tax.

This letter ruling is binding upon the Department of Revenue with respect to Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals. If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change. For this reason, the interpretation set forth above should be reviewed on a regular basis. Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.

Should additional information be needed, please contact Legal Counsel Stephen P. Sullivan, Office of General Counsel, Post Office Box 475, Jefferson City, Missouri 65105-0475 (phone 573-751-0961).

Sincerely,

Alana M. Barragán-Scott