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 120.0538

(a) In General

120.0538 Software License—Right to Use and Copy. "A" is the licensee of certain computer programs (Software Products) which it obtains from "B," an out-of-state author/licenser. The Software Products are copyrighted by B and various rights under the copyrights are transferred to A for which royalty payments are made. Copies of the Software Products are distributed for consideration in modified or unmodified form by A to third parties. A reports and remits to the Board sales tax computed on the gross receipts received for the copies of the Software Products.

The software agreement between A and B specifically grants A end user rights. Therefore, a portion of the fees paid by A are, in fact, attributable to end user fees. The supplements to the software agreement list designated CPUs and identify charges as "right-to-use fees" and "sub-licensing fees." The software agreement also states in part "solely for (A's) own internal business purposes." Thus, all amounts paid by A for the software agreement are subject to tax because the rights acquired are to use the software program and not to sell copies.

Parts of the sub-licensing agreement appear to come within the nontaxable area. The amounts paid for the right to make copies of the program for sale and for the right for demonstrating the sub-licensed program are not taxable. On the other hand, the amounts paid under the sub-licensing agreement for testing of CPU's and all other amounts paid for A's own use and are subject to sales or use tax. 3/16/88.