Laws, Regulations and Annotations


Business Taxes Law Guide—Revision 2024

Sales and Use Tax Annotations

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120.0000 Automatic Data Processing Services and Equipment—Regulation 1502

Annotation 120.0053

(a) In General

120.0053 Computer Software Programs. A company develops applications and systems software programs. The software, which is sold to original equipment manufacturers, (OEM) consists of two components: a "kernel" which is identical for all users regardless of the hardware, and a device-implementation portion that is unique for each type of hardware upon which the program will operate. The company licenses this software to OEM's under license agreements allowing sale of the software along with the hardware the OEM's sell to their customers. The company usually develops the entire kernel. The device—implementation is developed either entirely by the company, entirely by the OEM's, or jointly. Both the kernel and the device implementation, if any provided by the company may be in source program and/or object program format. The charge for this company's software is not separately stated in the charge made by the OEM's to their customers. The OEM's pay the company the following fees:

(1) royalties related to the hardware items containing the software sold or distributed by the OEM's;

(2) a non-recurring engineering fee for services in developing a device—implementation;

(3) a source license fee when the company provides some or all of its software in source;

(4) a fee for distribution to end users of documentation provided by the company in excess of a certain number of free copies.

Regardless of the manner or formula for determining the royalty payments and license fees and regardless of whether the copyright program is transferred by way of a source program and/or an object program format, no sales or use tax applies. This is also true regardless of whether it is delivered in the form of systems software or hard-wired board which would be inserted into the OEM's hardware. Neither sales nor use tax applies to non-recurring engineering fees with respect to services rendered by the company to develop software which is not part of a sale of tangible personal property. In addition, neither sales nor use tax applies to fees for software updates provided by the company to an OEM under a license agreement when a copyright attaches to those updates and they are transferred solely for the OEM to sell copies of those updates. 9/21/90; 1/17/91.