When did South Carolina Revenue Ruling 93-4 treat computer-software maintenance and support contracts as taxable?

Plain-English summary

South Carolina Revenue Ruling 93-4 divided software maintenance and support contracts into two groups. A contract sold in conjunction with the software was included in the taxable gross proceeds or sales price in full, regardless of whether it was optional or mandatory and regardless of whether its benefits were software, services, or both.

A contract sold separately — for example, by a third party or at a later date — required a true-object analysis. If the customer primarily sought tangible personal property such as software updates, the entire charge was taxable even if services were included. If the customer primarily sought services such as telephone assistance, the entire charge was not taxable even if some tangible property was supplied.

The ruling gave a taxable example: a contract supplied software updates at no extra charge and the original software became obsolete without them. It cautioned that failing one of those example factors did not automatically make another contract nontaxable; all facts still mattered.

Common questions

Q: Did it matter whether a maintenance contract sold with software was optional? No. Optional and mandatory contracts sold with the software were taxable.

Q: Were all later software-support contracts exempt? No. A later or separately sold contract was taxable when its true object was software or other tangible personal property.

Q: What software assumption supported the ruling? It addressed software sold and delivered in tangible form, such as magnetic tape or disk.

Citations and references

• S.C. Code Ann. §§ 12-36-90 and 12-36-130 (1992 Supp.) — gross proceeds and sales price
• S.C. Code Ann. §§ 12-36-910(A) and 12-36-1310(A) (1992 Supp.) — sales and use tax
• Regulations 117-174.48 and 117-174.262 — warranties and computer programs
• Citizens and Southern Systems, Inc. v. South Carolina Tax Commission, 280 S.C. 138, 311 S.E.2d 717 (1984)

Subject

Charges for Maintenance or Support of Computer Software

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR93-4.pdf

Original ruling text

SC REVENUE RULING #93-4

SUBJECT:

Charges for Maintenance or Support of Computer Software
(Sales and Use Tax)

TAX ANALYST:

Steve C. Hallman

EFFECTIVE DATE:

April 1, 1993

REFERENCE:

S.C. Code Ann. Section 12-36-90 (Supp. 1992)
S.C. Code Ann. Section 12-36-130 (Supp. 1992)
S.C. Code Ann. Section 12-36-910(A) (Supp. 1992)
S.C. Code Ann. Section 12-36-1310(A) (Supp. 1992)
Regulation 117-174.48
Regulation 117-174.262

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (Supp. 1992)
SC Revenue Procedure #87-3

SCOPE:

A Revenue Ruling is the Commission's official interpretation of how
tax law is to be applied to a specific set of facts. A Revenue Ruling is
public information and remains a permanent document until
superseded by a Regulation or is rescinded by a subsequent Revenue
Ruling.

Question:
Are charges for maintenance or support of computer software subject to the sales or use taxes?
Facts:
Frequently, when computer software is purchased or a license to use software is granted, the
purchasers or licensees enter into agreements for the maintenance or support of the software.
These agreements generally entitle the purchasers or licensees to one or more of the following
benefits:

1. Telephone assistance on standby or during certain hours.
2. Updated or new versions of the software as they become available.

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3. Coding or modifications to fit specific hardware needs.

4. Debugging of programs or correction of errors.
5. Training concerning use of the software.
6. Installation of the software.
   In addition to the various benefits that may be available through software maintenance or support
   agreements, diverse conditions exist in conjunction with the terms of these agreements. For
   instance, some agreements are entered into when the software is purchased or a license to use is
   granted and others are entered into some later time; some agreements are optional while other
   agreements are mandatory; etc.
   As a result of the diversity of benefits, conditions and terms associated with computer software
   maintenance or support agreements, there is some confusion as to whether the charges for these
   agreements are subject to the sales or use taxes.
   Discussion:
   Before we can discuss whether computer software maintenance contracts are subject to tax, we
   need to understand why sales of computer software are subject to tax.
   Computer Software
   Code Section 12-36-910(A) states:
   A sales tax, equal to five percent of the gross proceeds of sales, is imposed upon every
   person engaged or continuing within this State in the business of selling tangible personal
   property at retail. (Emphasis added.)
   Code Section 12-36-1310(A) reads:
   A use 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 the property, regardless of whether the
   retailer is or is not engaged in business in this State. (Emphasis added.)
   In Citizens and Southern Systems, Inc. v. South Carolina Tax Commission, 280 S.C. 138, 311
   S.E.2d 717 (1984), the Supreme Court of South Carolina determined that computer software sold
   and delivered to the purchaser by means of magnetic tape was tangible personal property and
   subject to the State's sales and use taxes.

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Regulation 117-174.262, "Automatic Data Processing Equipment and Programs" states, in part:

Prewritten Programs - The tax applies to total charges for coding, punching or otherwise
reproducing prewritten programs including charges for the tapes or other properties when
furnished by the seller or producer.
The temporary transfer of possession of a program for a consideration for the purpose of
direct use by the customer or to be reproduced by the customer on or into tapes or other
properties is a lease of tangible personal property subject to the tax on the total amount
paid even though the consideration may be labeled a license fee or royalty payment; and
even though royalty payments or payments for a license to use may be paid long after the
original programs are returned to the seller.
Custom Programs - Custom programs are programs prepared to the special order of a
customer, the gross proceeds therefrom being subject to the tax. Also considered to be
custom programs are sales of programs developed through modification of existing
prewritten programs to meet a customer's specific needs. Charges to modify and adapt
these programs to a customer's equipment (including testing) or translating a program to
a language compatible with a customer's equipment are services that are a part of the sale
price of tangible personal property and likewise subject to the tax.
In summary, computer software sold and delivered to a purchaser in a tangible form, such as by
magnetic tape or on a disk, is a sale subject to the sales or use tax.
Charges for Maintenance Contracts Made in Conjunction
With the Sale of Computer Software
Having established that the sale or purchase of computer software is subject to the sales or use
tax, we must next examine whether charges associated with the acquisition of software are
taxable (i.e. maintenance agreements).
The sales tax is imposed upon a retailer's "gross proceeds of sales" which is defined at Code
Section 12-36-90, in part, as:
...the value proceeding or accruing from the sale, lease, or rental of tangible personal
property... without any deduction for... the cost of materials, labor, or service... [or] any
other expenses....
The use tax is based upon the "sales price" of tangible personal property. The term "sales price"
is defined at Code Section 12-36-130, in part, as:
...the total amount for which tangible personal property is sold, without any deduction for
the cost of the property sold, the cost of the materials used, labor or service cost, interest
paid, losses, or any other expenses.

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(1)

The term includes:
(a)

any services or transportation costs that are a part of the sale, whether
paid in money or otherwise;...

In Meyers Arnold, Inc. v. South Carolina Tax Commission, 285 S.C. 303, 328 S.E.2d 920, 923
(1985), the Court of Appeals of South Carolina held the element of service involved in a lay
away sale was subject to tax as being part of the sale of tangible personal property. The test used
by the court was as follows:
...But for the lay away sales, Meyers Arnold would not receive the lay away fees. The
fees are obviously charged for the service rendered in making lay away sales. For these
reasons, this court holds the lay away fees are part of the gross proceeds and subject to
the sales tax. Accordingly, the total amount charged in conjunction with the sale or
purchase of tangible personal property is subject to the tax....(Emphasis added.)
A similar conclusion was reached in Regency Towers Association, Inc. v. South Carolina Tax
Commission, 88-CP-26-1109 (1989), where the Horry County Court of Common Pleas held
charges for maid service were not deductible from gross proceeds derived from charges for
accommodations. More recently, in Commission Decision #92-37, the Commission held that
charges for maid services, which were optional, were a part of the accommodations furnished to
transients and therefore subject to the accommodations tax.
In Commission Decision #90-38, the Commission held that charges for engraving services, even
though optional, were a part of the sale of plaques and trophies by the retailer and includible in
gross proceeds of sales. The decision states, in part:
...We find and conclude that here the "engraving charges" are part of the sale of tangible
personal property since the customer is not seeking a professional service but is seeking
an engraved trophy or plaque....

...The Courts have held that although the amount of materials used may be
inconsequential with respect to the labor involved where the customer seeks to purchase
custom made or designed tangible personal property, the artistic skill of the craftsman is
a part of the sales price of the product and is inextricably linked....
In addition, Regulation 117-174.48, entitled "Warranties", provides further guidance and reads,
in part:
On all sales of tangible personal property which include a charge for warranty which is a
part of the sales price of the property, such warranty charges are to be included in the
measure of the tax, even though said warranty charges may be billed separately from the
price of the merchandise.

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Warranty contracts entered into subsequent to the sale of tangible personal property and
which are separate and distinct from the sale, and for which a separate and distinct charge
is made are not to be included in the measure of the tax....
In summary, charges for maintenance agreements (whether optional or mandatory) that are made
in conjunction with, or as part of the sale of, computer software are includable in "gross proceeds
of sales" or "sales price", and, therefore, subject to the tax.
Maintenance Contracts Not Sold in Conjunction
with Computer Software
The above discussion concerns maintenance contracts that are sold in conjunction with the sale
of software. However, we must also consider sales of maintenance contracts that are not made in
conjunction with the sale of software (e.g. contracts sold by a third party and contracts sold at a
later date). In such cases the question often arises as to whether one is selling a service or
tangible personal property. Typically, such contracts provide software updates, technical
support, on-site modifications, etc.
In Commission Decision 89-1, the Commission considered whether charges for a digital data
tape, which when applied to the appropriate computer system would produce maps, were subject
to use tax. In reaching its conclusion that the charges were subject to tax, the Commission stated:
...Here the facts demonstrate that the true object of the subject transaction was to obtain
the digital data tape and base maps both of which are tangible personal property....
In Richland County v. South Carolina Tax Commission, 82-CP-40-2143 (1983), the Richland
County Court of Common Pleas held that tax map sheets made and delivered by a third party did
not represent a personal service transaction, but were the "saleable product" of the third party's
skill and therefore subject to the use tax.
In summary, if the true object of a particular transaction is to acquire or to use tangible personal
property, the transaction is subject to tax. The measure of the tax being the entire amount
charged for the contract. If the true object of a particular transaction is to acquire a service, as
opposed to tangible personal property, the transaction is not subject to tax.
Conclusions:
CONTRACTS SOLD IN CONJUNCTION WITH THE SALE OF SOFTWARE
Maintenance contracts (whether optional or mandatory) sold in conjunction with the sale of
computer software are includible in the measure of the sales or use tax. It is irrelevant whether
the maintenance contract is for tangible personal property, services, or both.

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CONTRACTS THAT ARE NOT SOLD IN CONJUNCTION
WITH THE SALE OF SOFTWARE
Maintenance contracts that are not sold in conjunction with the sale of computer software may or
may not be subject to the sales or use tax.
In determining whether or not a contract is taxable, the true object of the contract must be
established. If the true object of a contract is to acquire tangible personal property (e.g. software
updates), the total charges for the contract are taxable, even though certain services are also
provided. If the true object is to acquire services (e.g. telephone assistance), then the total
charges are not taxable, even though certain tangible personal property is also provided.
An Example of When the True Object of a Contract is the Sale of Tangible Personal Property:
The true object of a particular contract is to sell software, and the transaction is subject to tax,
where:

1. the contract provides for the purchaser to receive software updates;
2. there is no additional charge to the customer for the updates; and
3. the original software is obsolete without the updates (e.g. an income tax preparation
   program).
   While a contract is taxable if all the above are met, absence of one or more of the criterea does
   not establish that a contract is for the sale of services, as opposed to software. In such cases, all
   the facts and circumstances should be considered before concluding that a particular contract is
   not taxable.

SOUTH CAROLINA TAX COMMISSION

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

s/T. R. McConnell
T. R. McConnell, Commissioner

s/James M. Waddell
James M. Waddell, Commissioner
Columbia, South Carolina
, 1993
February 23

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