What does Louisiana Revenue Ruling 08-009 conclude about licensing fees for software used in electronic video bingo devices?

Plain-English summary

Louisiana treated both the manufacturer's video-bingo software license and the distributor's sublicense as taxable leases of tangible personal property. The software was prewritten, ownership never passed, and the right to operate the bingo devices ended if the required fees were not paid.

The ruling imposed 4% state lease tax on the manufacturer-to-distributor license and on the distributor-to-gaming-company sublicense.

Issue one: manufacturer licenses software to distributor

The manufacturer sold electronic video bingo devices to a distributor but retained all intellectual-property and proprietary rights in the operating software. The distributor received a nontransferable, nonassignable license and could sublicense only with the manufacturer's consent.

The distributor paid a daily license fee for every device operational and available to the public, generally remitted by quarter or another interval. The fee supported enhancements and maintenance. When the agreement ended, the distributor had to stop using the software and return copies, documentation, products, and confidential information.

Why the software was taxable property

La. R.S. 47:301(22) defined computer software broadly. The ruling classified this software as canned rather than custom because the manufacturer had prewritten it for installation in its video-bingo devices and it could be sublicensed to multiple customers. An exclusive sales territory did not make the software custom for that distributor.

Louisiana treated computer software as tangible personal property under La. R.S. 47:301(16)(a). Under La. R.S. 47:301(7)(a), possession of tangible personal property for consideration without transfer of title was a lease or rental.

The distributor owned the machines but not the software needed to perform their intended function. That separation—plus the loss of software use when fees stopped—made the license a lease.

Why this was not merely software maintenance

The ruling distinguished Revenue Ruling 04-001's description of software maintenance. Under an ordinary maintenance arrangement, a buyer might decline an upgrade yet continue using the older licensed version.

Here, nonpayment ended the distributor's right to use the software at all, and control reverted to the manufacturer. The Department also compared the arrangement with Revenue Ruling 06-014, where fees for technology needed to operate an eye-surgery machine were treated as a taxable lease.

Issue two: distributor sublicenses software to gaming company

A charitable gaming company bought devices from the distributor but received only a nontransferable, nonassignable sublicense to the software. It paid a daily fee for each device, billed monthly. If fees were more than 30 days late, the manufacturer or distributor could disable the software.

The distributor leased the software from the manufacturer and re-leased it to the gaming company. Relying on Central Marine Service, Inc. v. Collector of Revenue, the Department treated the sublicense as a taxable sublease: the gaming company paid consideration for control and use without receiving title.

What this means for you

Software licensors

Calling a payment a license fee did not avoid lease tax where the software was taxable tangible property, title stayed with the licensor, and nonpayment terminated all use.

Equipment distributors

Buying the hardware did not mean the distributor owned the operating software. The ruling taxed the separate ongoing license needed to keep the equipment functional.

Businesses sublicensing software

A sublicense can be a taxable re-lease when the first license is itself a lease and the downstream customer pays for continued use without title.

Common questions

Q: Was the video-bingo software canned or custom?

A: Canned. It was prewritten for the manufacturer's devices and sublicensed to multiple customers.

Q: Did the distributor own the software after buying the devices?

A: No. The manufacturer retained the software rights.

Q: Why was the license different from a maintenance contract?

A: Without the license payments, the distributor lost the right to use the software entirely; it could not continue using an older version.

Q: Was the gaming company's sublicense taxable too?

A: Yes. The ruling treated it as a taxable sublease or re-rental.

Q: What rate did the ruling apply?

A: It stated that both transactions were subject to 4% state lease tax.

Citations and references

• La. R.S. 47:301(7)(a) — lease or rental definition
• La. R.S. 47:301(16)(a) — tangible personal property definition
• La. R.S. 47:301(22) — computer software definition
• La. R.S. 47:301(23) — custom computer software definition
• Central Marine Service, Inc. v. Collector of Revenue, 162 So. 2d 81 (La. App. 4 Cir. 1964) — lease and sublease were both taxable
• Louisiana Revenue Ruling 06-014 — cited comparison involving technology needed to operate equipment
• Louisiana Revenue Ruling 04-001 — cited description of software maintenance arrangements
• LAC 61:III.101.C — Revenue Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA Revenue Ruling 08-009

Original ruling text

Revenue Ruling No. 08-009
July 3, 2008
Sales Tax Treatment of Licensing Fees Paid to the Manufacturers and
Distributors of Electronic Video Bingo Devices
The purpose of this Revenue Ruling is to clarify the sales tax treatment of agreements for the
licensing of software, which operates electronic video bingo devices.
Issue One
Whether the licensing of software pursuant to an Agreement between a Manufacturer of
electronic video bingo devices and a Distributor is the lease of tangible personal property and
subject to taxation.
Facts
Manufacturer is in the business of developing software and manufacturing gaming systems for
electronic video devices for the bingo industry in Louisiana. The Manufacturer entered into an
agreement with a Distributor appointing it as its exclusive distributor of the electronic video
bingo devices for an assigned territory. Distributor was granted a non-transferable, nonassignable license allowing it to market, distribute, and sublicense the electronic video bingo
devices and software. However, the Manufacturer retained all of its ownership rights to the
software including the intellectual property rights and all proprietary rights. The Distributor is
not allowed to reverse engineer or to copy the software, except in certain circumstances, and then
the copy must contain the Manufacturer’s trademark. The grant of the right to sublicense does
not give the Distributor any rights in or to the software operating the electronic video bingo
devices. The Distributor cannot assign, transfer, or sublicense the devices or software without the
prior consent of the Manufacturer.
The Manufacturer provided the Distributor with the initial product training for proper
installation, maintenance, and operation of the electronic video bingo devices and software. The
Distributor may order replacement parts from the Manufacturer’s discounted published price list.
To maintain its exclusive appointment, Distributor is required to order or pay for an agreed upon
number of electronic video bingo devices. If Distributor fails to do so, then the Manufacturer has
the right to then make the Distributor’s appointment nonexclusive.
The Distributor must pay the Manufacturer a daily license fee for each electronic video bingo
device sold by it during the term of the agreement. The license fee is charged by the
Manufacturer to defray the costs of periodic software enhancements and maintenance, and it will
make additional new products available at times. The license fee is due and payable for each day
that the device is operational and available for play to the public. The license fee is usually paid
to the Manufacturer at the end of each calendar quarter or other time interval. The Distributor is
allowed to deduct from the daily license fee a preset service fee per machine. This service fee is
allowed to the Distributor in consideration for collection of the licensing fee from its customers
and to defray, reimburse, and compensate Distributor for its administrative and office personnel
expenses related to collection.
The Agreement between the parties may be terminated in the event either one violates or fails to
comply with the conditions. Upon termination of the agreement, the rights and licenses granted
to the Distributor are terminated. The Distributor must cease all use of the software and return

Revenue Ruling No. 08-009
Page 2 of 4

any copies of software, documentation, products, and confidential information to the
Manufacturer.
Analysis
A “lease or rental” is defined in Louisiana Revised Statute 47:301(7)(a) as “the leasing or rental
of tangible personal property and the possession thereof by the lessee or renter, for consideration
without transfer of the title of such property.” In this situation, the Distributor has purchased
electronic video bingo devices from the Manufacturer and has been granted a license to use
software but not title thereto.
Computer software is tangible personal property. La. R.S. 47:301(16)(a) defines “tangible
personal property” in part as “personal property which may be seen, weighed, measured, felt or
touched, or is in any other manner perceptible to the senses.” Computer software is defined as a
set of statements, data, or instructions to be used directly or indirectly in a computer in order to
bring about a certain result. Computer software includes all types of software including
operational, applicational, utilities, compilers, and all other forms. La. R.S. 47:301(22).
Computer software is recognized as being in one of two groups, “canned” or “custom.”
“Custom” computer software means software which requires preparation, creation, adaptation or
modification by the vendor in order to be used in a specific work environment or to perform a
specific function for the user. La. R.S. 47:301(23). Canned computer software is pre-written or
“off the shelf” software.
The bingo computer software was pre-written by the Manufacturer for installation in its
electronic video bingo devices. The electronic video bingo devices and software are not destined
for an ultimate end user for use in a specific environment, as the electronic video bingo devices
are sold and the software sublicensed to any number of customers. Therefore, this software fits
the definition of canned computer software. The Manufacturer may have several Distributors
selling similar electronic video bingo devices in the same sales territory. In some instances, a
Distributor may be given the exclusive right to sell devices in an assigned territory based upon a
certain number of devices that it has paid for or ordered. However, this does not mean that the
software contained in the devices was created for the Distributor, who has been assigned the
exclusive territory. Furthermore, a Distributor is usually granted the right to purchase, sell, resell and lease the electronic video bingo devices.
The Distributor must pay a licensing fee to the Manufacturer every calendar quarter or after
another set interval of time. Distributor already has title to the electric video bingo devices but
does not have title to the software. The software is a necessary and integral part of the operation
of the electric video bingo devices. The sale of the electric video bingo device by the
Manufacturer cannot be separated from the right to use the device for its designated function.
The Department has already issued a ruling for a similar set of facts in Revenue Ruling No. 06014, in which a manufacturer sold an eye surgical machine to a group of physicians but retained
its intellectual property rights to the technology necessary to the operation of the machine. The
surgeons had to pay fees to the manufacturer for the use of the patented procedures necessary for
operation. The fees paid for the use of the eye surgery machine were treated as a taxable lease
transaction. Similar to the physician’s loss of the use of the technology necessary to operate the
eye surgery machine, the Distributor must cease use of the computer software and return all
copies of the software to the Manufacturer upon termination of the agreement.
This transaction between the Manufacturer and the Distributor is distinguishable from a
computer software maintenance contract. In Revenue Ruling 04-001, computer software

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maintenance agreements were described as releases to fix problems (“bug fixes”) with the
original software purchased, software upgrades provided either without charge or via payment of
periodic fees to software developers, or consultation support to licensees to address user-specific
problems. Typically, a purchaser buys computer software, which has a license for the current
version of the software. Later, the purchaser may choose to upgrade the software for an
additional charge. If the purchaser chooses not to upgrade the software, then the purchaser is still
able to use the outdated version of the licensed software. In this matter, however, a Distributor
who does not pay licensing fees will lose the right to use the electronic video bingo software.
Control of the electronic video bingo software reverts back to the Manufacturer, who owns the
license. Since title does not pass, the Distributor is leasing the electronic video bingo software.
Issue Two
Whether licensing of software for use in an electronic video bingo device by a Charitable
Gaming Company from the Distributor is taxable as the lease of tangible personal property.
Facts
A charitable gaming company (“Gaming Company”) purchased electronic video bingo devices
from a Distributor. As part of the agreement between the two parties, the Gaming Company was
granted a non-transferable, non-assignable sublicense by the Distributor. As part of the
agreement between the device Manufacturer and the Distributor, the Distributor may sublicense
the software. The Manufacturer retains ownership of all intellectual property rights in the
electronic video bingo devices, the software, data or information developed by it. The Gaming
Company takes title to the purchased electronic video bingo machines but not the software.
The Gaming Company must pay the Distributor a daily fee for the sublicense for each device.
The sublicense fees are due beginning in the first month in which the devices are operational and
available for the public to play. The Gaming Company must pay the sublicense fee monthly. If
the sublicense fees are paid late, then past due fees and interest accrue on the unpaid balance. If
the Gaming Company falls more than 30 days past due in paying the sublicense fees, then the
Manufacturer, Distributor, or a representative of either will disable the software in the electronic
video bingo devices.
Analysis
As evaluated in the first scenario, the electronic video bingo software is canned software. The
electronic video bingo software is the same in the second scenario. The software contained
within the electronic video bingo devices is an item of tangible personal property. Title to the
software does not pass to the Gaming Company. Monthly payments of the sublicense fee to the
Distributor are mandatory for the continued use of the software operating the electronic video
bingo devices.
The Distributor leases the software from the Manufacturer and then re-leases it to the Gaming
Company by sublicensing it. Re-rentals, re-leases, and subleases are considered taxable leases or
rentals. In Central Marine Service, Inc., v. Collector of Revenue, 162 So. 2d 81 (La. App. 4 Cir.
1964), the taxpayer rented barges to its customers, who in turn subleased the barges to the
ultimate users within the state. The Court found that the lease and sublease were both taxable and
held that the act of subleasing was an exercise of any right over tangible personal property. The
sublicense of the electronic video bingo software by the Distributor to the Gaming Company,
which in turn pays monthly licensing fees to the Distributor, is the lease of tangible personal
property for consideration without the transfer of title. The Distributor exercised its right of

control of the software by sublicensing it to the Gaming Company. The Gaming Company is
exercising the right of control of the software by providing the electronic video bingo devices for
customers to play. If the Gaming Company fails to make its monthly payments of the sublicense
fee, then it loses the right to use the electronic video bingo software. Therefore, the transaction
between the Distributor and the Gaming Company is a sublease or re-rental, which is a taxable
transaction, and lease tax is due thereon.
Ruling
In Issue One, the payment of licensing fees by the Distributor to the Manufacturer for the right to
use the software contained in an electronic video bingo device is the lease of tangible personal
property that is subject to the four percent state lease tax. The Distributor purchases the
electronic video bingo devices and contracts with the Manufacturer for a license for the right to
use the software. The Distributor does not receive ownership to the software, because the
Manufacturer retains its ownership rights to the software.
In Issue Two, Gaming Company purchases electronic video bingo devices from the Distributor.
By agreement with the Manufacturer, the Distributor is allowed to sublicense the right to use the
software. The Distributor sublicenses its right to use the electronic video bingo software to the
Gaming Company. In return, the Gaming Company pays the Distributor a monthly license fee.
The transaction between the Gaming Company and Distributor is a sublease of tangible personal
property and subject to the state lease tax in the amount of four percent.
Cynthia Bridges
Secretary
By:

Emily W. Toler
Attorney
Policy Services Division

A Revenue Ruling is written to provide guidance to the public and to Department of Revenue employees. It is
issued under LAC 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