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 120.0117

(a) In General

120.0117 License/Sublicense of Canned Software. A customer of a software retailer has requested the retailer to obtain a license for canned software and, in turn, sublicense the software to it in substantially the same form as acquired by the retailer. The distributor of the software is aware of the sublicensing by the retailer. This license and sublicense is a nonexclusive, nonassignable, and nontransferable license to use the program. The program can only be used on one computer where the program is installed.

The license term is characterized as a lease for an initial period of 12 months. The licensee (and sublicensee) have the right to extend the term for two additional 12-month periods unless either the licensee or distributor gives notice to the other party of the intent to terminate or renegotiate the agreement at least 60 days prior to the anniversary date. If within this 3 year period, the license is terminated for any reason, the licensee is to de-install the program from the computer on which it is installed and either certify to the lessor that the program was destroyed or return the program to the distributor.

The license fee is $27,000 and is due upon installation of the program. The annual renewal fee (referred to as a maintenance fee) is $6,000 and is due for each of the 2 years commencing on the first anniversary date. If after the three year period mentioned above, the licensee fails to continue its "lease" payments (maintenance fees), the program upgrade and support is terminated and the distributor has no obligation to reinstate. Licensee is not required to return or destroy the program after this three year period.

The retailer pays its vendor $27,000 upon installation and $6,000 on anniversary date and the lessor charges its customer $32,000 upon installation and $7,000 on the anniversary date.

In this case, there is an outright sale to the retailer followed by an outright sale by the retailer to its customer. During the initial three year period, if the license is not renewed, the retailer has the option of either certifying that the program was destroyed or of returning it to the distributor. After three years, the retailer apparently keeps the program even if the license is terminated. The retailer thus obtains possession of the program with no requirement to return it. This is a sale not a lease. (Regulation 1502(f)(1)(A) and (B).) The retailer's customer obtains the software on the same basis. Thus, the retailer is making an outright sale to its customer. The sale to the retailer is a sale for resale and is excluded from sales tax. The retailer's sale to its customer is the taxable retail sale. The measure of tax from that sale is the $32,000 sales price. Also, the $7,000 is subject to sales tax since "maintenance" contracts providing for supplying updates and later releases of the software are considered sales of tangible personal property. (Regulation 1502(f)(1)(C) and Annotation 120.0550.) 6/22/95.