How did Louisiana's 2004 ruling tax software maintenance agreements containing consultation, bug fixes, upgrades, updates, enhancements, canned software, or custom software?

Plain-English summary

Software-maintenance taxability depended on what the agreement provided, whether it included new or enhanced software, whether the software was canned or custom, whether components were separately available and priced, and when the transaction occurred.

Consultation-only support was not taxable. Free bug-fix releases created no charge to tax. Updates, modifications, and enhancements furnished after June 24, 1998 were treated as software sales under the historical rules discussed.

Canned and custom software

The ruling treated canned software updates, modifications, and enhancements as fully taxable.

For custom software, it described a phased exclusion:

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

These are historical percentages from the 2004 ruling.

Bundled maintenance packages

When a package included both taxable and nontaxable components, the full package was taxed at the highest applicable rate unless the nontaxable or lower-rate items could be bought separately and were separately priced.

Repair versus software sale

The Louisiana Supreme Court had held that updating, enhancing, reformatting, and advising were not taxable repairs because repair meant restoring something broken to its original condition.

Later legislation nevertheless caused software creation, modification, updating, or licensing to be treated as tangible-property transactions under the periods discussed.

Common questions

Q: Was consultation-only support taxable?

A: No.

Q: Were software upgrades and enhancements taxable?

A: Yes under the historical post-June 24, 1998 rules described, subject to the custom-software phaseout.

Q: Was canned software fully taxable?

A: Yes under the ruling.

Q: Could separately priced nontaxable support avoid bundle taxation?

A: Yes, if it was separately purchasable and separately priced.

Citations and references

• La. R.S. 47:301(16), (16)(e), and (16)(h)(i)-(iv)
• 1998 La. Acts 46 and 2002 La. Acts, 1st Ex. Sess., No. 7
• South Central Bell Telephone Co. v. Barthelemy, 643 So. 2d 1240 (La. 1994)
• Shaw Group, Inc. v. Kennedy, No. 02-0655 (La. App. 1st Cir. July 2, 2003)
• LAC 61:III.101.C — Revenue Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA Revenue Ruling 04-001

Original ruling text

Revenue Ruling
No. 04- 001
Sales and Use Tax
March 17, 2004
State Sales Taxability of Charges for Computer Software Maintenance Agreements

The purpose of this Revenue Ruling is to discuss the department’s position concerning the sales taxability of charges for computer software maintenance agreements in view of:
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The 1994 decision of the Louisiana Supreme Court in South Central Bell Telephone Company v. Sidney J. Barthelemy, et al., 94-0499 (La. 10/17/94), 643 So. 2d 1240, in which the court held that either “canned” or custom software constitutes “tangible personal property,” as the term is defined by La. Rev. Stat. Ann §47:301(16); An amendment by Acts 1998, No. 46 to the definition of “tangible personal property” for sales tax purposes, adding an exclusion from this term for the work products (other than work products consisting of the creation, modification, updating, or licensing of computer software) of persons licensed or regulated by Title 37 of the Louisiana Revised Statutes; The 2003 decision of the Louisiana First Circuit Court of Appeal in Shaw Group, Inc. v. Kennedy, 02 0655 (La.App. 1 Cir, 07/02/03), in which the court held that state sales tax was not due on Shaw’s purchases of certain enhancements for its existing software for periods before the effective date of Acts 1998. No. 46; and The phased-in exclusion of custom computer software from the definition of the term “tangible personal property”, as provided for by La. Rev. Stat. Ann. §47:301(16)(h)(i-iv) as enacted by Acts 2002, No. 7. This exclusion is discussed in detail in Revenue Ruling No. 02-008, which can be viewed from the department’s web site at http://www.rev.state.la.us/forms/lawspolicies/RR02008.pdf.

What Is Software Maintenance?
When a person purchases software, the person receives a license to use the version of the software that is current at the time of purchase. Software maintenance agreements, which are provided at additional cost, usually include combinations of several types of services:
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Maintenance releases, sometimes called bug fixes, enable purchasers to correct problems with software that the developers have detected after the release of the purchaser’s version of the software. Maintenance releases do not add capabilities to software beyond those included in the version of the software that was purchased.

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Software upgrades are priced for each release or are provided without additional charge to persons who have paid annual or other periodic fees to the software developers. Typically, software upgrades will enhance software beyond the capabilities of earlier versions of the software.

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Consultation Support enables software licensees to address user-specific problems to software developers.

Revenue Ruling No. 04-001
Page 2 of 3

Very often, there is no question of sales taxability associated with the furnishing of maintenance releases because the releases are furnished to identified purchasers without charge. Charges to a software licensee that provides the licensee only with the right of personal consultation with the software development company are likewise not taxable. Whether packages that include other services are taxable in full or in part, will depend upon:

1. the meaning ascribed by the vendor and the customer to term “maintenance services”;
2. whether any new or enhanced software is included within a “maintenance service”
   package;
3. whether the software included is “canned” or customized;
4. whether the “maintenance service” package includes any updating, enhancing and
   reformatting of software; and
5. on what dates those services are provided.
   The South Central Bell case involved a dispute between the City of New Orleans and South Central Bell over the sales and use taxability of computer software. The court upheld the assessments that the city made on South Central Bell’s purchases of customized software used in the operation of the company’s central office switching equipment. The court ruled that computer software, either “canned” or custom, constitutes taxable tangible personal property regardless of whether transmitted on media such as diskettes, by telephone lines, or by other means. In its South Central Bell ruling, the court also discussed the taxability of software maintenance services that, in the facts before the court, consisted of technical support by South Central Bell’s vendor, including updating, enhancing, and reformatting the software, and advising South Central Bell with respect to certain usages of the software. The City of New Orleans had sought to tax these so-called maintenance services under the provision of the city sales tax code that levied that tax on the furnishing of repairs to tangible personal property. The court held that the services in question were not taxable as repair services. The court held that a repair is replacing a part, putting together what is torn or broken, or restoring a thing to the condition in which it originally existed. In concluding that the Shaw Group’s purchases of certain enhancements for its existing software were not taxable during the period January 1994 through December 1996, the First Circuit Court of Appeals in Shaw Group v. Kennedy cited the language of South Central Bell regarding the taxability of maintenance services. The court noted, however, that Acts 1998, No. 46 changed the law governing the sales taxability of some software maintenance services, effective June 24, 1998. This act added § 47:301(16)(e) to the sales tax law to provide an exclusion from the definition of the term “tangible personal property,” and made an exception from that exclusion, as follows: (e) The term “tangible personal property” shall not include work products which are written on paper, stored on magnetic or optical media, or transmitted by electronic device, when such work products are created in the normal course of business by any person licensed or regulated by the provisions of Title 37 of the

Revenue Ruling No. 04-001
Page 3 of 3

Louisiana Revised Statutes of 1950, unless such work products are duplicated without modification for sale to multiple purchasers. This exclusion shall not apply to work products which consist of the creation, modification, updating, or licensing of computer software. In Shaw Group v. Kennedy, the court said that it would have determined the software modification and update transactions in that case to have been taxable, had the above language been in the sales tax law during the periods covering the transactions. Since the transactions then in question occurred during the years 1994 through 1996, and the above language was not added to the law until 1998, the court determined that the transactions were not taxable, in accord with the Louisiana Supreme Court decision in South Central Bell. Following the interpretation provided by Shaw Group v. Kennedy, transactions occurring after June 24, 1998, in which updates, modifications, or enhancements of software are provided are considered to be the equivalent of sales of new software. For periods between June 24, 1998, and June 30, 2002, all such transactions will be state sales or use taxable at 4 percent, regardless of whether the updates, modifications, or enhancements constitute “canned” software or custom software. Beginning July 1, 2002, updates, modifications, and enhancements that constitute “canned” software will remain taxable at 4 percent, but those that constitute custom software will be taxable at the percentages of their sales prices provided by §47:301(16)(h)(i-iv), 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 More recently, software “maintenance services” packages have included a variety of products and services. While some of the software-related services within the packages may not be taxable as repairs, some services or products included within “maintenance services” packages might constitute sales of new or enhanced software. If a package of products and services consists of both taxable and non-taxable components, the entire package is taxable at the highest rate applicable to any component of the package, unless the non-taxable or lower-percentage taxable components can be purchased separately from those that are taxable at higher rates, and are separately priced. Questions concerning this matter can be directed to the Taxpayer Services Division at (225) 2197356. Cynthia Bridges Secretary By:

Raymond E. Tangney
Senior Policy Consultant
Policy Services Division

A Revenue Ruling is written to provide guidance to the public and to Department of Revenue employees. It is issued under Section 61:III.101(C) of the Louisiana Administrative Code 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.