June 18, 2008
Dear Applicant:
This is a letter ruling issued by the Director of Revenue pursuant to Section 536.021.10, RSMo, and Missouri Code of State Regulations 12 CSR 10-1.020 in response to your correspondence dated April 18, 2008.
The facts as presented in your letter are summarized as follows.
Applicant is headquartered out-of-state and does not maintain a business location in Missouri. Applicant provides financial advisory, risk management and general business consulting services.
Beginning in 2003, Applicant also began licensing canned software and providing software related services to its financial advisory customers. Applicant installs the software at its customer’s site. The software license agreement applies to the software license and the related maintenance services. The maintenance services include updates, upgrades, and fixes to the current version of the software. Applicant charges annual maintenance fees.
The management agreement provides professional services including consulting, integration, implementation, installation, temporary workarounds, modifications, enhancements or improvements, training, and training materials. With the management agreement, Applicant provides custom modifications to the canned software in order for the software to interact with the customer’s system environment. While Applicant has standard file layout specifications, rarely does it receive client files that are formatted in accordance with those layout specifications. The project plan for those clients involves numerous tasks and various modifications.
The 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 project plan also includes significant training of the customer’s personnel during and after the software implementation.
Applicant’s clients must purchase all of the aforementioned services with the software license. The individual services are not itemized in the contract. Instead, Applicant charges a lump sum for the software license and the related maintenance and management services.
Are Applicant’s sales of software license and management agreements with custom modifications subject to sales or use tax?
Yes, Applicant’s sales of software license and management agreements with custom modifications are subject to sales or use tax.
Section 144.020.1, RSMo, imposes a 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, RSMo, imposes a tax on the use, storage, or consumption of tangible personal property purchased from outside of Missouri and brought into the state. 12 CSR 10-109.050(1) provides that “the sale of canned computer software programs is taxable as the sale of tangible personal property.” 12 CSR 10-109.050(2)(A) provides, in relevant part, that “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(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, Applicant’s sales of software license and management agreements are taxable notwithstanding the custom modifications.
Are the annual software license maintenance fees charged by Applicant subject to sales or use tax?
Yes, the annual software license maintenance fees charged by Applicant are subject to sales or use tax.
12 CSR 10-109.050(3)(F) provides, in relevant part, that:
Program installation, training and maintenance of software services are not taxable under the following circumstances:
- The purchase of the services is not mandatory under a software purchase agreement and the services are separately stated on the purchase invoice from software or other items purchased; or
- The services are purchased separately from software or other tangible personal property.
The purchase of Applicant’s maintenance services is mandatory. Applicant’s clients must purchase all of the aforementioned services with the software license. The individual services are not itemized in the contract. Instead, Applicant charges a lump sum for the software license and the related maintenance and management services. Therefore, the maintenance fees are subject to sales or use tax.
Are the various services provided in Applicant’s management agreement, such as installation and training, subject to sales or use tax?
Yes, the various services provided in Applicant’s management agreement, such as installation and training, are subject to sales or use tax. See Response 2.
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 Associate Counsel Dori Drummond, Office of General Counsel, Post Office Box 475, Jefferson City, Missouri 65105 (phone 573-751-0961), or me.
Sincerely,
Omar D. Davis