Were separate computer hardware and software maintenance fees subject to South Carolina use tax under PLR 89-6?

Plain-English summary

South Carolina Private Letter Ruling 89-6 reached opposite results for two computer maintenance contracts: the separately purchased hardware maintenance was not subject to use tax, but the mandatory software support was taxable.

ABC leased computer hardware from XYZ and paid use tax on the lease. It separately paid X $510 per month to keep the equipment operating in its original condition; enhancements cost extra. The ruling treated that maintenance as a service that was not specifically taxed and was not part of the hardware lease because the lease came from XYZ while the maintenance came from X.

ABC also bought a $7,250 license to application software delivered in sealed packages with manuals and other documentation. Under the historical rule described in the ruling, software delivered in tangible form was taxable tangible personal property.

The $185 monthly software support fee covered phone support, training, and problem corrections. Unlike hardware maintenance, that support was required when ABC bought the license. If support ended, X could remove or demand return of the software. Those contract terms made the support service part of the taxable software sale.

Common questions

Q: Why was the hardware maintenance fee not taxable? It was a separately purchased service from a different party and was not part of the taxable equipment lease.

Q: Did the hardware agreement include upgrades? No. The stated understanding was that it kept the equipment in its original condition; enhancements were separately paid.

Q: Why was the software itself taxable? It was delivered in a tangible form: sealed packages containing magnetically recorded programs, manuals, and documentation.

Q: Why was software support taxable? ABC had to purchase and keep paying for it to retain the software license, so the ruling treated support as part of the sale.

Q: Were optional new programs included in the monthly support fee? No. The facts said new programs were optional and paid for separately.

Q: Can another computer customer rely on PLR 89-6? No. The ruling says it applies only to the specific facts or circumstances in the request and has no precedential value.

Citations and references

• S.C. Code Ann. § 12-35-810 (historical use tax)
• S.C. Code Ann. § 12-35-140 (historical tangible-personal-property definition)
• S.C. Code Ann. § 12-35-120 (historical sales-price definition)
• Edisto Fleets, Inc. v. South Carolina Tax Commission, 256 S.C. 350, 182 S.E.2d 713 (1971) (lease treatment quoted in the ruling)
• Citizens and Southern Systems, Inc. v. South Carolina Tax Commission, 280 S.C. 138, 311 S.E.2d 717 (1984) (tangibly delivered software)
• S.C. Code § 12-3-170 and SC Revenue Procedure 87-3 (authority identified in the ruling)

Subject

Computer Hardware, Software & Maintenance Contracts

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR89-6.pdf

Original ruling text

SC PRIVATE LETTER RULING #89-6

TO:

ABC

SUBJECT:

Computer Hardware, Software & Maintenance Contracts
(Sales and Use Tax)

REFERENCE:

S.C. Code Ann. Section 12-35-810 (1976)
S.C. Code Ann. Section 12-35-515 (Supp. 1987)
S.C. Code Ann. Section 12-35-140 (1976)
S.C. Code Ann. Section 12-35-120 (1976)

AUTHORITY:

S.C. Code Ann. Section 12-3-170 (1976)
SC Revenue Procedure #87-3

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer, upon
request, and it applies only to the specific facts or circumstances related in the
request. Private Letter Rulings have no precedential value and are not
intended for general distribution.

Questions:

1. Are the monthly fees for a computer hardware maintenance contract, paid by ABC,
   subject to the State's use tax, pursuant to Code Section 12-35-810?
2. Are the monthly fees for a computer software maintenance contract, paid by ABC,
   subject to the State's use tax, pursuant to Code Section 12-35-810?
   Facts:
   ABC is leasing a computer system, including terminals and printers, (computer hardware) from
   XYZ of Wisconsin. The initial term of the lease is sixty months and the monthly rental is
   $771.39, plus $38.59 use tax, for a total payment of $809.96.
   Initially, ABC determined the type of hardware needed for its business and arranged the
   transaction through X. X sold the computer hardware to XYZ which, in turn, executed a lease
   with ABC. In addition, ABC pays a monthly fee of $510.00 to X for maintenance of the
   computer hardware.

1

The contract, which arranged these transactions, does not clearly specify what ABC receives for
the payment of the hardware maintenance fees. However, it appears, and it is the understanding
of ABC, that the maintenance agreement is "to keep the equipment running in its original shape
and not to enhance it. Any enhancements [will be] paid for separately."
At the same time the computer hardware leasing contract was executed, ABC purchased a right
or license to use "application programs" (computer software) from X for $7,250.00. ABC also
pays, by contract, a monthly fee of $185.00 to X maintenance and support of this software.
The contract granting the license to use the software does not clearly specify what ABC receives
for these fees. However, it appears, and it is the understanding of ABC, that such fees pay for
phone support, training, and corrections of software problems. Any new programs are optional
and would be paid for separately.
Discussion:

1. The first issue is whether or not the payment of the monthly computer hardware
   maintenance fee constitutes the purchase at retail of tangible personal property for
   storage, use or consumption in this State.
   Code Section 12-35-810 reads, in part:
   An excise tax is imposed on the storage, use or other consumption in this State of
   tangible personal property purchased at retail for storage, use or other consumption in
   this State, at the rate of [five] percent of the sales price of such property, regardless of
   whether the retailer is or is not engaged in business in this State. (emphasis added)
   Code Section 12-35-140 defines "tangible personal property" and reads, in part:
   The term "tangible personal property" means personal property which may be seen,
   weighed, measured, felt or touched or which is in any other manner perceptible to the
   senses, except notes, bonds, mortgages or other evidences of debt and stocks and shall
   include rooms, lodgings or accommodations furnished to transients for a
   consideration.
   For the purposes of this chapter the term "tangible personal property" shall be
   interchangeable with and apply with equal force and effect to services,
   accommodations and intangibles, including communications, as are specifically
   provided for in this chapter.
   In summary, tangible personal property must be either personal property perceptible to
   the senses or a service specifically provided for in the sales and use tax chapter.
   The service provided by X under the maintenance contract is not specifically taxed under
   the sales tax law. However, we must also review the definition of "sales price" found in
   Code Section 12-35-120. That section reads, in part:

2

The term "sales price" means the total amount for which tangible personal property is
sold, including any services that are a part of the sale....
In Edisto Fleets, Inc. v. South Carolina Tax Commission, 256 S.C. 350, 182 S.E.2d 713
(1971), the South Carolina Supreme Court held:
Although the definition of the term "sale" as found in Section 65-1360 does not
specifically refer to the lease or rental of tangible personal property, the same
nonetheless is included because of the definition of the term "purchase" that is
provided in Section 65-1357. The terms "sale" and "purchase" are inextricably
related and bound together and must be so construed and the term "purchase"
specifically refers to the lease or rental of tangible personal property. This conclusion
is fortified by the failure of the General Assembly in 1955 to amend the definition of
the term "sale" to specifically include the words "lease or rental of tangible personal
property." It would be unreasonable for this Court to conclude that the General
Assembly amended the statute in 1955 to define as a retailer a person that leases or
rents tangible personal property and at the same time intend that such person be
exempt from the tax because the lease or rental was not a sale of tangible personal
property.
In summary, a lease of tangible personal property is a sale of tangible personal property
under the State's sales and use tax law.
It must now be determined whether or not the service provided under the maintenance
contract is a service that is part of the sale. A review of the transaction indicates that the
computer hardware (tangible personal property) is leased from XYZ, which is collecting
and remitting the use tax on the lease, while the maintenance contract (service) was
purchased from X Corp. In summary, the service provided under the maintenance
contract is not a service that is a part of the lease of the computer hardware.

2. The second issue is whether or not the payment of the monthly computer software
   maintenance fee constitutes the purchase at retail of tangible personal property for
   storage, use or consumption in this State.
   A determination, with respect to this issue, requires a review of the taxability of the sale
   or purchase of computer software. In Citizens and Southern Systems, Inc. v. South
   Carolina Tax Commission 280 S.C. 138, 311 S.E.2d 717 (1984), the South Carolina
   Supreme Court held:
   We agree with the trial judge that the computer software was delivered to C & S in a
   form which could be seen, weighed, measured, felt and touched and was therefore
   tangible personal property, a sale of which is subject to the State's sales and use taxes.
   Furthermore, the Commission in a finding issued on February 26, 1987 held that,
   where computer software is not delivered to the purchaser in a tangible form, then the
   seller has provided a service and has not sold tangible personal property. Therefore,
   the State sales tax was not applicable to the transaction.

3

In summary, computer software delivered in a tangible form is subject to the sales or use
tax.
The opening statement of the Software License Agreement reads:
Whereas Licensor develops proprietary computer software programs which exist as
written products in written and magnetically recorded form as well as user manuals
and other appropriate documentation supporting such products (collectively referred
to hereinafter as "Licensed Software") for Licensee...(emphasis added).
Section 11 of the Software License Agreement reads:
Licensor will ship all Licensed Software in sealed packages with specific serial
numbers assigned to each package. Breaking or opening the seal without approval
from Licensor will acknowledge acceptance by Licensee.
The software was, therefore, delivered in a tangible form and is subject to the use tax.
It must now be determined if the software maintenance contract is part of the sale of
the software.
Sections 9 and 22 of the agreement read respectively:
Software support fees will be subject to change on a 60-day written notice to
Licensee. If the prices are increased, the Licensee may terminate this agreement on
the effective date of the price change by a 30-day written notice prior thereto;
otherwise such new prices shall become effective on the date specified. Licensor
reserves the right and Licensee agrees to permit Licensor to remove all Licensed
Software under this License Agreement from Licensee's premises if cancellation of
software support services by either party occurs.

If any of the terms and conditions of this agreement are broken by End User, in
addition to all other legal rights and remedies, X may terminate this license. Upon
termination, End User shall return to X all products and copies, thereof, whether
modified, merged or included with other software and shall certify in writing to X
that End User has not retained any X products or copies, thereof. The provisions of
this license which protect proprietary rights of X shall continue in force after
termination.
Furthermore, it was confirmed by a representative of X that ABC was required to
purchase, and remit monthly payments (support fees) for, the computer software
maintenance contract, when they purchased the license to use the software. In addition, if
a customer terminates the monthly support payments under Section 9 of the contract, X
will request the return of the software.

4

In summary, the computer software maintenance contract is a service that is a part of the sale of
the software (tangible personal property).
Conclusions:

1. The monthly fees for the computer hardware maintenance contract, paid by ABC to X,
   are not subject to the State's use tax, pursuant to Code Section 12-35-810 and 12-35-120.
2. The monthly fees for the computer software maintenance contract, paid by ABC to X, are
   subject to the State's use tax, pursuant to Code Sections 12-35-810 and 12-35-120.

SOUTH CAROLINA TAX COMMISSION

s/S. Hunter Howard Jr.
S. Hunter Howard, Jr., Chairman

s/A. Crawford Clarkson Jr.
A. Crawford Clarkson, Jr., Commissioner

s/T. R. McConnell
T. R. McConnell, Commissioner
Columbia, South Carolina
, 1989
April 19

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