How were receipts from a software support, maintenance, and enhancement plan apportioned under the former Texas franchise tax?

Plain-English summary

The maintenance-plan renewals were software-license receipts sourced to the payor's location.

Customers received software upgrades, extensions, and enhancements about four times a year plus telephone support. Telephone support represented about 1.5% of the provider's plan costs; the remaining costs related to the software updates.

Texas concluded that the plan licensed a computer program. Its charges were therefore apportioned based on the payor's location.

The Comptroller rejected the separate argument that renewal charges were connected with the original perpetual license. Each renewal was a separate agreement.

What this means for you

Software companies reviewing historical receipts

A support plan dominated by recurring software deliveries was classified as a software license rather than primarily telephone support.

Tax professionals

Document the plan's deliverables and cost mix, and distinguish a renewal agreement from the original license transaction.

Common questions

Q: How were the renewal charges sourced?
A: By the payor's location.

Q: Why was the plan treated as a software license?
A: Nearly all plan costs related to upgrades, extensions, and enhancements.

Q: Was the renewal considered part of the original license?
A: No. It was a separate agreement.

Citations and references

• The letter states the historical location-of-payor rule but cites no section number.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9705380L

Original ruling text

May 20, 1997

Dear **:

Wade Anderson and I have reviewed the information you provided in our meeting
regarding **, on April 14.

You contend that the receipts from the Support, Maintenance, and Enhancements
Plan (the Maintenance Plan) for the periods subsequent to the initial period
for a perpetual license (i.e., 12 months) should be apportioned to the location
of payor because:

1. the software maintenance charges under the Maintenance Plan are made in
   connection with the licensing of the program, or

2. the Maintenance Plan is the sale or license of a computer program.

I understand that ** sends upgrades, extensions, and enhancements
for the licensed software to each customer covered by the Maintenance Plan
approximately four times a year. The customer also receives telephone support.
The cost of providing telephone support is approximately 1.5% of
**'s costs for the Maintenance Plan while the remaining costs
relate to the cost of providing the software upgrades, extensions, etc.

Based on the information provided, we have concluded that the Maintenance Plan
involves the licensing of a computer program. Accordingly, charges for the
Maintenance Plan should be apportioned based on the location of payor.

Although we agree that the charges for the Maintenance Plan are for the
licensing of software, we do not agree that the charges are made in connection
with the original licensing of the program because the renewal of the plan is a
separate agreement.

This response is based on the facts presented and current law. If there are
different or additional facts, the response may change.

If you have any questions, contact Tax Policy Division. You may call toll free
1-800-531-5441, or our regular number is 512/463-4600. My extension is 3-4662.
You may write me at Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Bob Jeffcoat
Tax Policy Division