Were optional software-maintenance charges taxable when the contract provided updates and future releases?

Plain-English summary

A software licensor provided a public-utility customer with software maintenance consisting generally of updates and future releases. It sought a refund on the theory that the maintenance contract was optional.

The memorandum said a contract to provide updates and future releases was a sale of tangible personal property, so its charges were taxable even when the customer could choose whether to buy the maintenance.

Telephone or on-site consultation was different. If the customer could separately choose those services for a separately stated price in addition to the storage media, the consultation charge was nontaxable. If consultation was not separately optional, its charge was taxable as part of the storage-media sale or lease.

Citations and references

• No statute, regulation, or case citation appears in the source memorandum.

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/120-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/120-0550.pdf

Original ruling text

State of California

Memorandum
To

:

Mr. Eugene Crane
Audit Review and Refunds Unit - MIC:39

From :

Ronald L. Dick
Senior Tax Counsel

Subject:

L--- N--- I--- S--SC --- XX-XXXXXX

Board of Equalization
Legal Division

120.0550
Date: May 6, 1993

This is in reply to your February 23, 1993 mini-memo regarding a claim for refund by L--- N--- I--- S--- for charges for the licensing of software to the C--- P--- U--- Commission (CPUC). You note that L---'s claim is based on its belief that it erroneously charged tax on an optional maintenance contract; however, L--- apparently has not provided any details or explanation of the facts or code provisions upon which it basis its claim. Under the licensing agreement, L--- provides software to the CPUC and maintenance of that software. The maintenance appears generally to be L---'s providing to the CPUC updates and future releases of the software. The contract to provide the CPUC with the updates and future releases is a contract for the sale of tangible personal property. Charges for such a software maintenance contract are subject to sales tax regardless that the contract may be optional with the purchaser. The issue which arises with respect to charges for optional software maintenance contracts is the application of tax to charges for telephone or on-site consultation services. If the purchaser may, at its option, contract for the consultation services for a separately stated price, in addition to the charges for the storage media, then the charges for the consultation services are nontaxable. If the purchaser does not have the option to purchase the consultation services in addition to the storage media, then the charges for the consultation services are taxable as part of the sale or lease of the storage media. If you have further questions regarding this, feel free to write again; however, please provide an explanation of the facts surrounding the transaction and the specific charges which L--- believes is nontaxable.

Mr. Eugene Crane

RLD:sr

-2-

May 6, 1993