How did Louisiana phase in its former custom-software exclusion, and how were canned-software components taxed during the transition?

Plain-English summary

Louisiana phased custom software out of taxable tangible personal property over four years, while phasing canned components used by custom programmers into full taxation.

Custom software meant software prepared, created, adapted, or modified for a particular customer's special order or specific needs, regardless of delivery method or use of preexisting components. Other software remained taxable under the ruling.

Custom-software sales phase-in

• July 1, 2002-June 30, 2003: 25% excluded and 75% taxed.
• July 1, 2003-June 30, 2004: 50% excluded and 50% taxed.
• July 1, 2004-June 30, 2005: 75% excluded and 25% taxed.
• July 1, 2005 and later: 100% excluded under the ruling.

The state exclusion applied automatically. A local jurisdiction's sales or use tax followed only if that jurisdiction elected the exclusion by ordinance.

Canned software used in a custom program

Before full exclusion, the canned component was partly treated as purchased for resale in proportion to the taxable custom-software sale. The remainder was the custom programmer's taxable use.

The percentages moved inversely: 25% of the canned-software cost was taxed in 2002-03, 50% in 2003-04, 75% in 2004-05, and 100% after June 30, 2005. The matching advance tax credit fell from 75% to 50%, then 25%, then zero.

The controlling period was the custom software's sales date, not the date the canned component was purchased.

Common questions

Q: Did delivery method determine whether software was custom?

A: No. The definition applied regardless of how the software was furnished, delivered, or transmitted.

Q: Could a custom program contain preexisting routines or utilities?

A: Yes.

Q: After June 30, 2005, did canned software incorporated into custom software qualify for resale treatment under this ruling?

A: No. It was fully taxable to the programmer, with no advance tax credit.

Q: Did every local jurisdiction have to follow the exclusion?

A: No. Local application required an election by ordinance.

Citations and references

• La. R.S. 47:301(16)(h) — custom-software definition and exclusion
• Act 7 of the 2002 First Extraordinary Session
• LAC 61:III.101.C — Revenue Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA Revenue Ruling 02-008

Original ruling text

Revenue Ruling
No. 02- 008
August 28, 2002
Sales and Use Tax
Custom Computer Software To Be Excluded From The Definition Of
Tangible Personal Property

This Revenue Ruling describes the procedures for reporting sales and use tax on purchases of
“canned” software by vendors of custom computer programs during the four-year phase in
period of the sales tax exclusion provided by R. S. 47:301(16)(h), which was enacted by Act 7 of
the 2002 First Extraordinary Session of the Legislature.
Act 7 excludes custom computer software from the definition of tangible personal property for
state sales and use taxes and local sales and use taxes imposed by jurisdictions that elect to
exempt custom software by ordinance. The Act defines custom computer software as
“…software prepared, created, adapted, or modified to the special order of a particular purchaser,
licensee, or user; or to meet the specific needs or requirements of a particular purchaser, licensee,
or user, regardless of the means by or through which such computer software is furnished,
delivered, or transmitted, and regardless of whether such software incorporates or consists of
preexisting routines, utilities, or other computer software components.” All other computer
software that is not included as part of a custom program is subject to state and local sales and
use taxes.
The sales tax exclusion provided by Act 7 will be phased in over the four-year period from July
1, 2002, through June 30, 2005. The amount of the sale price of custom computer software to be
excluded from the definition of tangible personal property and not subject to sales or use tax is as
follows:
July 1, 2002 through June 30, 2003 ................ 25 percent excluded—75 percent taxed
July 1, 2003 through June 30, 2004 ................ 50 percent excluded—50 percent taxed
July 1, 2004 through June 30, 2005 ................ 75 percent excluded—25 percent taxed
July 1, 2005 and thereafter.............................. 100 percent excluded—Not taxable
Tax on Canned Software used in Custom Programs
Prior to Act 7, the sale of canned software incorporated into custom programs was treated as a
sale for resale because sales tax was collected on the sale of the custom program. Any sales tax
paid on these purchases by custom software vendors qualified for an advance tax credit (ATC).
Under Act 7, purchases of canned software for use in custom programs will not qualify as sales
for resale after June 30, 2005, because once custom programs are excluded from the sales tax,
the purchase of canned software for use in custom programs will be subject to use tax to be paid
by the custom programmer. However, because the exclusion for custom computer software will
be phased in from July 1, 2002, through June 30, 2005, the purchase of canned software for use
in custom applications will be treated as a purchase for resale according to the percentage of the
custom software’s sales price that is subject to sales or use tax based on the sales date of the
custom software.

Revenue Ruling 02-008
August 28, 2002
Example: Canned software purchased to be incorporated into custom software that is sold
between July 1, 2002, and June 30, 2003, would be taxed at 25 percent because sales tax would
be collected on 75 percent of the custom software sales price. If the vendor paid sales tax on the
canned software purchase, 75 percent of the sales tax paid would be eligible for advance tax
credit. If no sales tax was paid on the canned software purchase, the custom software vendor
would owe use tax on 25 percent of the canned software purchase price. As the sales tax
exclusion is phased in, custom software vendors should pay sales tax on canned software
purchases as follows:
Date of Sale of Custom Software
Canned Software Percentage Taxed
July 1, 2002 through June 30, 2003 ................... 25 percent taxed—75 percent ATC
July 1, 2003 through June 30, 2004 ................... 50 percent taxed—50 percent ATC
July 1, 2004 through June 30, 2005 ................... 75 percent taxed—25 percent ATC
July 1, 2005 and thereafter................................. 100 percent taxed—No ATC
If a custom software vendor buys canned software costing $1,000 for inclusion in a custom
software package, the use tax liability or advance tax credit based on the state sales tax rate of
four percent will be as follows:
Period*

July 1, 2002 - June 30, 2003
July 1, 2003 - June 30, 2004
July 1, 2004 - June 30, 2005
July 1, 2005 - and thereafter

Advance Tax Credit Allowed
if $40 Sales Tax Paid

Use Tax Due
if no Sales Tax Paid

$30 Advance Tax Credit
$20 Advance Tax Credit
$10 Advance Tax Credit
No Advance Tax Credit

$10 Use Tax Due
$20 Use Tax Due
$30 Use Tax Due
$40 Use Tax Due

*Note: The period refers to the custom software sales date and not the canned software purchase
date.

All canned software incorporated into custom software that is sold after June 30, 2005, is subject
to sales and use tax and any sales tax paid on the purchase will not qualify for the advance tax
credit.
Questions or comments regarding this issue should be directed to the Taxpayer Services Division
of the Department of Revenue. They may be contacted by telephone at 225.219.7356 or by mail
at Post Office Box 66258, Baton Rouge, Louisiana 70802.
Cynthia Bridges
Secretary
By: ________
J. A. Cline, Jr. CPA
Revenue Tax Research Analyst
Policy Services Division

A Revenue Ruling is written to provide guidance to the public and to Department of Revenue employees.
It is issued under Louisiana Administrative Code 61:III.101.C to apply principles of law to a specific set of
facts. A Revenue Ruling does not have the force and effect of law and is not binding on the public. It is a
statement of the department's position and is binding on the department until superseded or modified by a
subsequent change in statute, regulation, declaratory ruling, or court decision.