Did RR 96-3 impose South Carolina sales or use tax when software was delivered entirely by modem and telephone line with no physical media?

Plain-English summary

South Carolina Revenue Ruling 96-3 said software sold and delivered entirely by electronic means was not subject to sales or use tax under the facts presented.

The customer received the software in South Carolina through a modem and telephone line. No diskette, magnetic tape, or other physical copy was delivered. The Department distinguished that transaction from software supplied on tangible media, which its prior policy and cited case treated as taxable tangible personal property.

Electronically delivered software was intangible. The Department then asked whether the payment was nevertheless a taxable communications charge. Applying the true-object test, it concluded that the customer bought the software itself, not access to or use of the telephone system. The connection was only the means of delivery.

SC Revenue Ruling 12-1 later expressly modified RR 96-3 while retaining the central electronic-delivery distinction and adding guidance for onsite computer-to-computer transfers, direct source-code work, and hosted application access.

Common questions

Q: Did using a telephone line make the software a taxable communication service? No. The ruling found that the true object was the intangible software, not use of the communications system.

Q: Did the ruling cover software delivered on a diskette or tape? It distinguished that delivery as taxable tangible personal property.

Q: Would a transaction with both a download and a physical backup copy fit this ruling? No. The stated facts involved no tangible copy at all.

Q: Is RR 96-3 the latest software guidance? No. RR 12-1 expressly modified it and addresses additional software-delivery and hosted-service facts.

Citations and references

• S.C. Code Ann. §§ 12-36-910 and 12-36-1310 (sales, use, and communications tax)
• S.C. Code Ann. § 12-36-60 (tangible personal property and specified taxable intangibles)
• Citizens and Southern Systems, Inc. v. South Carolina Tax Commission, 280 S.C. 138, 311 S.E.2d 717 (1984) (software on magnetic tape cited)
• SC Revenue Ruling #93-4 (tangible-media software guidance cited)
• SC Revenue Ruling #12-1 (expressly modified RR #96-3)

Subject

Electronic Delivery of Computer Software

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR96-3.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214

SC REVENUE RULING #96-3 (TAX)

SUBJECT:

Electronic Delivery of Computer Software
(Sales and Use Tax)

EFFECTIVE DATE: Applies to all periods open under statute.
SUPERSEDES:

All previous documents and any oral directives in conflict
herewith.

REFERENCES:

S.C. Code Ann. Section 12-36-910 (Supp. 1995)
S.C. Code Ann. Section 12-36-1310 (Supp. 1995)
S.C. Code Ann. Section 12-36-60 (Supp. 1995)

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (Supp.1995)
S.C. Revenue Procedure #94-1

SCOPE:

A Revenue Ruling is the Department of Revenue's official advisory
opinion of how laws administered by the Department are to be
applied to a specific issue or a specific set of facts, and is provided
as guidance for all persons or a particular group. It is valid and
remains in effect until superseded or modified by a change in the
statute or regulations or a subsequent court decision, Revenue
Ruling or Revenue Procedure.

Question:
Is computer software sold and delivered by electronic means, as described in the facts,
subject to sales and use tax?
Conclusion:
Computer software sold and delivered by electronic means, as described in the facts, is
not subject to sales and use tax.
Facts:
Technology has progressed to the stage that computer software may be sold in many
forms. Software may be sold in traditional forms such as computer diskettes or magnetic

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tapes. Today, technology also permits computer software to be sold and delivered
electronically as described in the following transaction.
Company A has purchased computer software for its own business use. No portion of the
computer software will be delivered on computer disks or magnetic tapes. Instead, the
software will be electronically delivered to Company A in South Carolina via a modem
and telephone line.
The purpose of this document is to determine whether computer software that is
electronically delivered in transactions similar to that described above is subject to South
Carolina sales and use tax.
Discussion:
Code Section 12-36-910(A) imposes a sales tax and reads:
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.
Code Section 12-36-1310(A) imposes a use tax and 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.
Therefore, for the sales or use tax to apply there must be a retail sale or retail purchase of
tangible personal property.
Code Section 12-36-60 defines the term "tangible personal property" to mean:
...personal property which may be seen, weighed, measured, felt, touched, or
which is in any other manner perceptible to the senses. It also includes services
and intangibles, including communications, laundry and related services,
furnishing of accommodations and sales of electricity, the sale or use of which is
subject to tax under this chapter and does not include stocks, notes, bonds,
mortgages, or other evidences of debt. (Emphasis added).
Therefore, the term tangible personal property includes the sale or use of intangibles,
including communications, that are subject to South Carolina sales or use taxes under
Chapter 36 of Title 12.

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Communications are subject to sales and use taxes under Chapter 36 of Title 12 pursuant
to Code Sections 12-36-910(B)(3) and 12-36-1310(B)(3), which impose the tax on the:
gross proceeds accruing or proceeding from the charges for the ways or means for
the transmission of the voice or messages, including the charges for use of
equipment furnished by the seller or supplier of the ways or means for the
transmission of the voice or messages; (Emphasis added).
For the electronic delivery of software to be subject to sales and use taxes, it must be
determined that the gross proceeds are derived from the sale of tangible personal property
as defined in Code Section 12-36-60. The term tangible personal property includes
services and intangibles, such as communications, which are subject to tax under Code
Sections 12-36-910 and 12-36-1310.
A review of longstanding administrative policy indicates that computer software sold and
delivered in the form of a computer diskette or magnetic tape is tangible personal
property subject to taxation. See Citizens and Southern Systems, Inc. v. South Carolina
Tax Commission, 280 S.C. 138, 311 S.E. 2d 717 (1984) and also SC Revenue Ruling

93-4.

Unlike computer software delivered in the form of a computer diskette or magnetic tape,
computer software sold and delivered by electronic means cannot be seen, weighed,
measured, felt, touched or is not otherwise perceptible to the senses. Accordingly, such
computer software is an intangible and is subject to taxation only if it is
"communications" taxed under Chapter 36 of Title 12 pursuant to Code Sections 12-36910 and 12-36-1310.
The Code, however, does not provide definitions for various terms or phrase found in
Sections 12-36-910(B)(3) and 12-36-1310(B) (3); therefore, it is necessary to determine
their "ordinary and popular meaning." It is an accepted practice in South Carolina to
resort to the dictionary to determine the literal meaning of words used in statutes. For
cases where this has been done, see Hay v. South Carolina Tax Commission, 273 S.C.
269, 255 S.E. 2d 837 (1979); Fennel v. South Carolina Tax Commission, 233 S.C. 43,
102 S.E. 2d 424 (1958); Etiwan Fertilizer Co. v. South Carolina Tax Commission, 217
S.C. 354, 60 S.E. 2d 682 (1950).
The Second College Edition of the American Heritage Dictionary provides the following
definitions:
"Way"

• A manner of doing something.

"Means"

• A method, course of action, or instrument by which an act
  can be accomplished or some end achieved.

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"Transmission"

• The act or process of transmitting; the state of being
  transmitted; something transmitted, as a voice or message.

"Transmit"

• To send from one person, thing or place to another;
  convey;...

In addition, the Second Edition of the American Heritage Dictionary defines
"communications," in part as "a means of communicating, esp.: a system for sending and
receiving messages, such as mail, telephone or television."
In summary, the statute imposes the sales and use tax on the gross proceeds accruing and
proceeding from the charges for the manner, methods and instruments for sending a voice
message.
Next, it is important to review the statute again to fully understand, specifically, what is
taxed when imposing the tax on the charges for the manner, methods and instruments for
sending a voice or message. The statute specifically includes, as taxable, "the charges for
use of equipment furnished by the seller or supplier of the ways or means for the
transmission of the voice or of messages;..."
The following quote is from 73 Am Jur 2d, Statutes Section 250:
In the interpretation of a statute, the legislature will be presumed to have inserted
every part thereof for a purpose.... A statute should not be construed in such
manner as to render it partly ineffective or inefficient if another construction will
make it effective. Indeed, it is a cardinal rule of statutory construction that
significance and effect should, if possible, without destroying the sense or effect of
the law, be accorded every part of the act, including every section, paragraph,
sentence or clause, phrase, and word....
Applying this rule to the question at hand, it must be presumed that the phrase "including
the charges for use of equipment furnished by the seller or supplier of the ways or means
for the transmission of the voice or of messages" was inserted in Code Sections 12-36910(B)(3) and 12-36-1310(B)(3) by the Legislature for a special reason, as such charges
were already subject to the tax pursuant to Code Sections 12-36-910(A) and 12-361310(A). Therefore, "charges for the ways or means for the transmission of the voice or
messages" imposes the tax upon something more than merely communications
equipment. If the Legislature had intended to tax only charges for use of the equipment,
then Code Sections 12-36-910(B)(3) and 12-36-1310(B)(3) would have been
unnecessary, as such charges were already taxable.

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Therefore, based on the above discussion, it is reasonable to conclude that charges for the
ways or means of communication must be charges for access to, or use of, a
communication system, whether this charge is based on a fee per a specific time period or
per transmission. (See SC Revenue Ruling #91-10.)
Based upon the statutory language contained in Code Sections 12-36-910(B)(3)and 1236-1310(B)(3) and the general meaning of the term "communication", the Department of
Revenue has taxed communication services such as telephone services, facsimile
transmission services, database access transmission (legal research, stock quotes, credit
reporting), and electronic voice mail services. All of these communication services and
others currently taxed by the Department of Revenue constitute communication systems,
both large and small, that the purchaser pays to access or use. (See Commission Decision

89-77 and SC Revenue Ruling #89-14.)

In addressing whether the computer software is a "communication", it must be determined
whether the purchaser of computer software sold and delivered by electronic means is
paying for access or use of the communication system (e.g. the telephone). Applying the
"true object test" provides guidance in making this determination. In this instance, the
true object of the sale of computer software electronically delivered, as described in the
facts, is the sale of the intangible software: the "true object" is not the access or use of the
communication system. To conclude otherwise stretches the statutory language.
Accordingly, computer software sold and delivered by electronic means, as described in
the facts, does not meet the definition of tangible personal property set forth in Code
Section 12-36-60 or fall within the provisions of Code Section 12-36-910 or Code Section
12-36-1310.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Burnet R. Maybank III
Burnet R. Maybank, III, Director

Columbia, South Carolina
January 12
, 1996

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