How did Utah tax pharmacy-computer data services, reports, training, installation, freight, insurance, labels, software and hardware maintenance, rentals, and management services?
Apply this to your situation
This page answers the general question as of 1994. Ask about yours and see what current Utah tax law says, with citations.
Plain-English summary
Utah Private Letter Ruling 94-0001 classified fifteen pharmacy-computer products and services.
Electronic pricing information, electronic claim processing, related transaction reports, and aging reports were nontaxable.
Canned software, hardware maintenance, equipment rental, rental start-up charges, and facilities management involving substantial tangible property were taxable.
Several other items turned on delivery method, optionality, separate statement, title passage, cost pass-through, or how the customer used the product.
1. Electronic price-file updates
The company transmitted pharmaceutical pricing information electronically from out-of-state computers to Utah customer computers.
Nothing was printed or written.
The Commission said the described service was not currently treated as taxable under Utah law.
2. Third-party claim processing
The company electronically submitted pharmacy prescription claims to insurers and sent reports documenting claim activity.
The Commission treated the processing and associated reports as nontaxable because they were not sales of tangible personal property.
3. Aging reports
Monthly accounts-receivable aging reports sent to pharmacies were also treated as nontaxable.
The response did not distinguish paper from electronic delivery for this item.
4. Third-party software maintenance
Creating, maintaining, and updating programs used for claim submission was nontaxable unless the company provided program updates through tangible personal property such as diskettes or magnetic tape.
The response cited Utah Admin. Rule R865-19-92S.
5. Training
Two days of training accompanied the sale of new computer equipment.
Training was taxable when the equipment sale was taxable, whether the training charge was included or separately stated.
The Commission treated services connected with a taxable tangible-property sale as part of the tax base.
6. Installation
A third party unboxed equipment, connected cables, and ran diagnostics at the store.
The Commission treated the installation charge as taxable, either as part of the tangible-property sales price or as installation of tangible property in connection with other tangible property.
It cited Rules R865-19-78S and R865-19-51S.
7. Freight
Separately stated common-carrier freight was exempt when shipment occurred after title passed.
The response cited Rule R865-19-71S and Tax Bulletin 5-91.
8. In-transit insurance
The separately stated insurance charge was exempt when:
- The insurance covered damage after title passed to the customer.
- The customer was billed the same amount the seller paid the insurer.
9. Three-part pharmacy labels
The label classification depended on function.
A label remaining on the sold product and primarily benefiting the customer was exempt packaging.
Labels serving as invoices, receipts, or accounting records were taxable to the pharmacy.
If a three-part label was predominantly for the seller's use, its sale to the pharmacy was taxable.
10. Software maintenance contracts
The optional contract included consultation and prewritten improvements or error corrections delivered on storage media.
The response gave two results:
- Optional consultation-only service without tangible property: exempt when separately stated.
- Contract including a right to prewritten improvements on storage media: entire contract taxable.
11. Hardware maintenance
The company described replacement parts, telephone installation guidance, monthly service contracts, and third-party on-site work.
The Commission said all three hardware-maintenance options were taxable under Rule R865-19-78S.
12. Canned software
Prewritten programs used without modification were taxable under Rule R865-19-92S.
13. Equipment rentals
Monthly charges for equipment and a nontransferable software license were taxable on the gross periodic rental payment.
The rental bundled price-file, software-maintenance, hardware-maintenance, and third-party-maintenance items.
The response cited Rule R865-19-32S.
14. Initial start-up fee
The rental start-up fee covered administration, documentation, installation, and in-transit insurance.
The Commission treated the entire fee as taxable part of the rental price even though separately stated.
15. Facilities management
Facilities management included system reports, mailing, file-maintenance documents, and communication-control work.
The Commission said the service appeared to transfer substantial quantities of tangible personal property and was therefore taxable.
Holding
Under the stated 1994 facts:
- Electronic data and claim-processing services were nontaxable.
- Aging reports were nontaxable.
- Tangible-media software updates could make maintenance taxable.
- Training and installation tied to taxable equipment were taxable.
- Post-title, separately stated freight could be exempt.
- Post-title insurance passed through at cost could be exempt.
- Label treatment depended on packaging versus seller recordkeeping.
- Optional, separately stated consultation could be exempt.
- Software-update contracts with tangible media were fully taxable.
- Hardware maintenance, canned software, rentals, start-up fees, and facilities management were taxable.
What this means for you
Pharmacy-technology and software companies
Separate electronic services, software, tangible media, equipment, maintenance, training, and installation. Delivery method and bundling can change taxability.
Equipment sellers and lessors
Document title passage, freight, insurance cost, rental components, and separately stated services.
Accountants and tax professionals
Treat this as historical classification guidance. Reanalyze every item under current digital-product, SaaS, software, service, freight, and bundled-transaction law.
Common questions
Q: Were electronic price and claim-processing services taxable?
A: No, under the described facts.
Q: Was canned software taxable?
A: Yes.
Q: Could software consultation be exempt?
A: Yes, when optional, separately stated, and not involving tangible property.
Q: What if a maintenance contract included software updates on media?
A: The entire contract was taxable.
Q: Was freight taxable?
A: Not when separately stated and shipped after title passage.
Q: Were equipment rentals and start-up fees taxable?
A: Yes.
Q: How were three-part labels treated?
A: Customer-benefit packaging could be exempt; invoice, receipt, accounting, or seller-use labels were taxable.
Key source language
- Claim processing: “are not considered as constituting the sales of tangible personal property, and are, therefore, exempt from the tax.”
- Consultation: “charges for such consultation services are exempt if separately stated.”
- Software updates: “If the maintenance contract includes the right to prewritten improvements furnished on storage media, the entire charge for the contract is taxable.”
- Rental: “taxable on the gross amount of each periodic rental payment.”
Citations and references
- Utah Admin. Rule R865-19-92S
- Utah Admin. Rule R865-19-78S
- Utah Admin. Rule R865-19-51S
- Utah Admin. Rule R865-19-71S
- Utah Admin. Rule R865-19-32S
- Utah Tax Bulletin 5-91
Source
- Landing page: Utah Private Letter Rulings
- Official ruling: Utah PLR 94-0001
- Identifier note: the official URL and HTML title use 94-001, while the official body begins 94-0001; the page preserves both without silently normalizing either.
- Fetch note: the exact official URL returned HTTP 404 to a direct request and was then retrieved through Sofya.
Original ruling text
Response April 8, 1994
Request
December 17, 1993
Legal Division
Utah State Tax
Commission/Heber M. Wells Office Bldg.
160 East 300 South
Salt Lake City, UT
84134
Attention: Tax
Department
We would like you to render an opinion as
to the taxability of the following services under the Utah State Tax Law.
- Price File Update Services
Electronic transfer of pricing information
transmitted via telephone from computers in Michigan to customer computers in your state. None of the material is printed or written. XXXXX obtains the data from an outside party via electromagnetic tape and resells to our customers. This information is used by our customers in the pricing of pharmaceutical items sold at the retail level.
- 3Rd Party Claim Processing
A service where by XXXXX acts as a third
party, submitting prescription insurance claims to insurance carriers on behalf of retail pharmacy owners. Data is transferred electronically via telephone from the customer computer in your state to remote computers outside of your state for review, edit and submission to insurance carriers via electronic transmission or electromagnetic tape. Reports pertaining only to information extracted from the customers files are sent to the customer periodically. These reports document claims transaction activity.
- Aging Reports
A monthly accounts receivable report is
sent to the pharmacy detailing all claims XXXXX has sent to the carriers for payment on behalf of the Pharmacy.
- 3Rd Party Maintenance
Creation, maintenance, and updating of
computer programs specific to the function of third party prescription claim submission. Programs being updated are unique to different states and over 100 regional insurance carriers. New programs are generally transmitted from Michigan to customers in your state via telephone.
5. Training
We
provide a 2 day training on the sale of new computer equipment. This training service is provided as a part of the sale of tangible personal property and is included in the price of the equipment.
- Installation
A flat fee for a 3rd party to install
computer equipment at store location. Installation includes travel to store site, un-boxing, connecting cables and running a diagnostics test. This charge is separately stated on the invoice. Installations can also be done by customer with phone assistance from Michigan Office. Customer unpacks, connects all cables and initiates activation of the software.
- Freight
Shipping charges are separately stated on
the invoice. All shipping is done by common carrier. Transportation occurs after the sale.
- In-Transit
Insurance
Separately stated charge on invoice to cover
the cost of insurance against any damage that may occur during shipment from Michigan warehouse to store location.
- Labels
A 3 part pharmacy label for pharmacists.
One part is affixed to the prescription bottle when filled. Second part is given to customer as a receipt. Third part is kept by pharmacist for his accounting records. These labels are a continuous form that is fed through pharmacy printer for prescription information.
- Software
Maintenance
Optional maintenance contract. The maintenance
contract provides that the purchaser will be entitled to receive, during the contract period, telephone or on-site consultation services and storage media on which prewritten improvements or error corrections have been recorded. Costs to provide consultation services are 60% and storage media updates to software is 40%.
a.) Purchaser has the option to purchase
only the consultation service independent of storage media improvements. Indicate if these services should be billed separately or are not billed separately.
b.) Purchaser does not have the option to
purchase the consultation service independent of storage media improvements. Indicate if these services should be billed separately or are not billed separately.
- Hardware
Maintenance
Optional maintenance contract for the
following services:
a.) Depot Exchange - Replacement parts are shipped to the customer from Michigan. The customer only pays for the replacement part. The customer is instructed via telephone the proper procedure for replacing the part.
b.) Depot Contracted - Replacement parts
are shipped to the customer from Michigan. The customer is charged a monthly fee. The customer is instructed via telephone the proper procedure for replacing the part.
c.) Contracted Maintenance - The customer
is charged a monthly fee. Two options:
1.) A third party goes on-site and
replaces the part.
2.) A third party goes on-site. The part
is shipped from Michigan to the store location.
- Canned
Software
Pre-written programs used by customer
without modification.
- Equipment
Rental
XXXXX agrees to provide renter equipment
and a non-transferable license to use the computer software for a monthly fee. XXXXX shall hold title to the equipment and software at all times. The rental period shall be 48 months with a 1 year automatic renewal. Price File, Software Maintenance, Hardware Maintenance and 3rd Party Maintenance as discussed above are included in the rental fee.
- ** Initial
Start-up Fee **(Rental's Only)
Includes administrative fees,
documentation, installation and in-transit insurance.
- Facilities
Management
Provide management services to chain
stores that include the following: Daily, weekly and monthly system reporting and mailing. File maintenance source documents will be prepared and provided to the Chain. As changes are required, the file maintenance source doc. will be completed, signed and faxed or mailed. Communication control verify all remote pharmacies are transmitting data to the host location on a daily frequency. Services performed in Michigan home office.
In order to substantiate the taxability of
each item, feel free to return this letter with "yes" or "no" taxing. Also, please mark with state stamp.
Sincerely,
XXXXX
Tax Manager
April 8, 1994
Re: Advisory Opinion -
Sales or Use Tax Application to Various Sales and Services
Dear XXXXX:
Your request (copy attached) for an
advisory opinion as to whether certain sales and services are subject to the Utah Sales and Use Tax Act was referred to the Auditing Division for their analysis.
The division's staff recommendations are
as follows:
1.
XXXXX as described are not currently treated as taxable under the Utah statute.
2.
Third Party Claim Processing as described and the associated reports documenting claims transactions are not considered as constituting the sales of tangible personal property, and are, therefore, exempt from the tax.
3.
$$$$$ Charges for Ageing Reports sent to the pharmacy are similarly not considered as taxable sales of tangible personal property.
4.
Third Party Maintenance charges as described are not considered taxable unless program updates, etc., are provided to customers by way of tangible personal property (diskettes, magnetic tape, etc.), See Rule R865-19-92S attached.
5.
Training charges, whether included in the price of equipment or separately stated, are taxable if the sales of the equipment are taxable. Generally, charges for services in connection with the sale of tangible personal property are included in the tax base for sales tax computation.
6.
Charges for installation as described in your request are subject to the tax as part of the sales price of the tangible personal property or as installations of tangible personal property in connection with other tangible personal property. See Rules R865-19-78S and R865-19-51S.
7.
Freight charges which are separately stated and for shipment subsequent to title passage are exempt from the tax. See Rule R865-19-71S and Tax Bulletin 5-91 attached.
8.
Charges for In-Transit Insurance are exempt if such insurance covers damage occurring after title passage to the customer, and if it is billed to the customer in the same amount paid by the seller to the insurance company.
9.
Labels which remain on the article sold and are primarily for the benefit of the customer are exempt from tax as packaging. Labels which act as invoices, receipts, and accounting records are taxable to the XXXXX. When a three part label or form is used that is predominately for the use of the seller (XXXXX), then the sales of such labels to the pharmacy should be considered as taxable.
10.
Charges for Software Maintenance are covered in general in Rule R865-19-92S.
a.
If the purchaser of the software has the option of purchasing only telephone or on-site consultation services not involving the transfer of tangible personal property, charges for such
consultation services
are exempt if separately stated.
b.
If the maintenance contract includes the right to prewritten improvements furnished on storage media, the entire charge for the contract is taxable.
11.
Charges for Hardware Maintenance are subject to the tax under all three options described in your request. See Rule R865-19-78S.
12.
Sales of Canned Software are taxable as indicated in Rule R865-19-92S.
13.
Equipment Rental charges as described in your request are taxable on the gross amount of each periodic rental payment. See Rule R865-19-32S.
14.
The Initial Start-up Fee is taxable as part of the rental price even if separately stated.
15.
Facilities Management charges appear to entail the transfer of substantial quantities of tangible personal property and are therefore subject to the tax.
Based upon the facts presented in your
letter, we are in agreement with the Auditing Division's recommendations. Obviously, if there are deviations from these facts, this opinion may be negated.
For The Commission,
Alice Shearer
Commissioner
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