How did South Carolina change the tax treatment of software maintenance contracts effective September 1, 2011?

Plain-English summary

South Carolina Revenue Ruling 11-2 announced the September 1, 2011 change for software maintenance contracts.

A maintenance contract purchased with taxable software remained taxable. If the software transaction was exempt or otherwise nontaxable, the simultaneously purchased contract followed that treatment under the rule described.

A maintenance contract purchased after the software was generally no longer subject to sales and use tax, although the ruling referenced limited exceptions without listing them.

Relationship to the broader warranty change

Act No. 32 of 2011 returned warranty and maintenance contract treatment, including withdrawals of parts used to fix defective products, to the approach in effect before October 1, 2005.

For software and software maintenance transactions occurring on or after September 1, 2011, the Department reinstated SC Revenue Ruling #03-5. The reinstated RR #03-5 replaced SC Revenue Ruling #05-13.

Practical timing rule

RR 11-2 supplies a short transition rule rather than a full software tax guide:

• maintenance sold with taxable software: taxable;
• maintenance sold with exempt or nontaxable software: follows that software treatment under the stated rule; and
• maintenance sold later: generally nontaxable, subject to limited exceptions.

Whether the software itself was taxable could depend on facts not detailed in RR 11-2, including how it was delivered or accessed. The ruling directs readers to reinstated RR 03-5 for the fuller framework.

Common questions

Q: Did every software maintenance contract become exempt?

A: No. A contract purchased at the same time as taxable software remained taxable.

Q: What about a support contract added after the software purchase?

A: The ruling says a later-purchased maintenance contract was generally nontaxable, with limited exceptions.

Q: Which earlier software guidance controlled after the change?

A: The Department reinstated RR #03-5 and stated that it superseded RR #05-13.

Citations and references

• South Carolina Act No. 32 of 2011 — statutory change described by the ruling
• Chapter 36 of Title 12, S.C. Code — sales and use tax law referenced by the ruling
• SC Revenue Ruling #03-5 — reinstated software and maintenance guidance
• SC Revenue Ruling #05-13 — superseded guidance

Subject

Software and Software Maintenance Contracts

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR11-2.pdf

Original ruling text

State of South Carolina
Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214
Website Address: http://www.sctax.org

SC REVENUE RULING #11-2

SUBJECT:

Software and Software Maintenance Contracts
(Sales & Use Tax)

EFFECTIVE DATE:

September 1, 2011

SUPERSEDES:

SC Revenue Ruling #05-13

REINSTATES:

SC Revenue Ruling #03-5

REFERENCES:

Chapter 36 of Title 12 (2000 and Supp. 2010)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (Supp. 2010)
SC Revenue Procedure #09-3

SCOPE:

The purpose of a Revenue Ruling is to provide guidance to the public
and to Department personnel. It is an advisory opinion issued to apply
principles of tax law to a set of facts or general category of taxpayers. It
is the Department’s position until superseded or modified by a change in
statute, regulation, court decision, or another Departmental advisory
opinion.

Act No. 32 of 2011 amends the application of the sales and use tax to warranty or maintenance
contracts effective September 1, 2011. The changes that are effective September 1, 2011, amend
the sales and use tax law so that the application of the tax to warranty or maintenance contracts,
and to the withdrawals of parts to fix a defective product under these contracts, will be the same
as it was prior to October 1, 2005.
The statute continues to tax the sale of a warranty or maintenance contract purchased at the same
time the tangible personal property is purchased, unless the sale of the tangible personal property
is exempt from the tax. However, with limited exceptions, the sales and use tax will no longer
apply to a warranty or maintenance contract purchased after the tangible personal property is
purchased.

Based on this change in the law, SC Revenue Ruling #03-5, concerning “Software and Software
Maintenance Contracts,” has been reinstated and is effective for sales of software and software
maintenance contracts occurring on or after September 1, 2011. SC Revenue Ruling #03-5, as
reinstated effective September 1, 2011, now supersedes SC Revenue Ruling #05-13.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/James F. Etter
James F. Etter, Director
November 18
, 2011
Columbia, South Carolina

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