Were initial and annual software source-code escrow fees taxable when customers received access only if the software company ceased doing business?

Plain-English summary

Utah Private Letter Ruling 96-120 said a pure software source-code escrow fee was not taxable when it purchased only an intangible right to obtain the code if the software company stopped doing business.

The answer changed if the fee included software support or maintenance. Those charges were taxable.

The Commission could not give one unconditional result because the request did not make clear whether support or maintenance was included in the escrow fee.

Escrow arrangement

The company sold software containing proprietary source code that customers could not access.

Customers could pay a separately itemized escrow fee. An escrow company would hold the source code, and the customer could claim it only if the software company ceased doing business.

The fee was optional and renewable annually. If a customer declined renewal, it lost the future right to claim the source code.

The company asked about both the initial fee and annual renewal.

General software-tax rule

The response said Utah taxed purchases or uses of tangible personal property in the state.

It also said software support and maintenance were taxable under the cited statute and Utah Admin. R. R865-19S-92(B).

If the escrow fee included support or maintenance, the company had to collect and remit tax on that portion.

Pure escrow right was intangible

If the fee did not include software support or maintenance, the Commission compared it with intangible property described in Utah Code section 59-12-102(18)(b).

In that situation, the customer bought only an intangible right to the source code if the specified future event occurred.

The escrow fee was then nontaxable.

Initial and renewal fees

The response did not create separate rules for the initial fee and renewal.

Its analysis turned on the content of the charge:

• Pure escrow right: nontaxable.
• Included software support or maintenance: that portion taxable.

The same factual question therefore mattered for both the initial invoice and annual renewals.

Unresolved factual issue

The Commission said the request did not make clear whether the escrow fee included software maintenance and support.

It therefore did not classify the actual fee definitively.

The ruling provided the test the company needed to apply once the contract and invoiced components were known.

Holding

Under the ruling:

• A pure source-code escrow right was intangible and nontaxable.
• Software support and maintenance were taxable.
• Any support or maintenance included in the escrow fee was taxable.
• The request lacked enough information for one final answer.
• Initial and renewal fees followed the same component-based analysis.

What this means for you

Software companies

Define what an escrow charge buys. Do not combine contingent source-code access with support or maintenance without identifying the taxable components.

Software customers and escrow providers

The label escrow fee did not control. Contract rights and included services determined the historical tax result.

Accountants and tax professionals

Review the agreement, invoice, renewal terms, support obligations, maintenance rights, and current digital-product law.

Common questions

Q: Was a pure source-code escrow fee taxable?

A: No, under the ruling.

Q: Why was it nontaxable?

A: It purchased an intangible contingent right to receive the source code.

Q: What if support or maintenance was included?

A: That portion was taxable.

Q: Did the ruling classify the actual fee definitively?

A: No. The facts did not show whether support or maintenance was included.

Q: Did annual renewal receive a different rule?

A: No separate rule was stated; the same component analysis applied.

Key source language

• Taxable component: “if you include charges for software support and maintenance in the escrow fee charged to your customers, your company must collect and remit the Utah sales and use tax for that portion of the fee.”
• Intangible right: the response classified the customer's contingent source-code access as intangible rather than tangible property.
• Nontaxable result: “the escrow fee would not be taxable”
• Missing fact: “It is unclear from the information provided in your letter whether or not the escrow fee charged to your customers includes charges for software maintenance and support.”

Citations and references

• Utah Code Ann. § 59-12-103(1)(n)
• Utah Code Ann. § 59-12-103(1)(I), as printed in the official source
• Utah Code Ann. § 59-12-102(18)(b)
• Utah Admin. R. R865-19S-92(B)

Source

• Landing page: Utah Private Letter Rulings
• Official ruling: Utah PLR 96-120
• Source-text note: the response prints the software-service citation as “59-12-103(1)(I).”
• Fetch note: the exact official URL returned HTTP 404 to a direct request and was then retrieved through Sofya.

Original ruling text

96-120

Response August 5, 1996

Request

July 15, 1996

XXXXX

State Tax Commission

Heber M. Wells Bldg

160 East 300 South

Salt Lake City, UT 84134

Re: Letter of Opinion

Gentlemen:

XXXXX is a software and publication company specializing in Sales, Use, Property and Payroll Taxation. A formal opinion on the application, if any, of Sales/Use Tax is hereby requested on the following transaction.

Transaction

The XXXXX software contains a copyrighted calculation system known as source code. The source code is contained in our software, however, our customers do not have access to the code.

Each customer purchasing our software system will be given the option of paying an Escrow Fee. The Escrow Fee entitles the customer to file a claim with an escrow company, which will retain the source code for the software. A claim may only be filed if XXXXX were to cease doing business. The Escrow Fee will be separately line itemized on the invoice and renewable annually at the customer�s option. Should the customer decline to renew the Escrow Fee, they will forfeit their right to file a claim with the escrow company for the source code in the event XXXXX ceases doing business.

Question

Is the Escrow Fee an intangible property or tangible personal property transaction?

Is the Escrow Fee subject to Sales or Use Tax when the customer is invoiced for their initial purchase?

Is the annual renewal fee subject to Sales or Use tax?

Your assistance in providing an answer to the above questions would be greatly appreciated. Should you have any questions or require further information, contact me at XXXXX.

Sincerely,

XXXXX

August 5, 1996

XXXXX

RE: Advisory Opinion - Application of Utah Sales and Use Tax

Dea r XXXXX

We have received your request for an opinion regarding your company�s obligation to collect and remit sales and use tax on the escrow fees it charges Utah customers. We understand that payment of the escrow fee allows your customers access to your company�s source code in the event your company ceases business. We offer the following guidance:

Vendors are required to collect and remit Utah sales and use tax for sales of all tangible personal property sold to customers within the state of Utah.

Section 59-12-103(1)(n) of the Utah Code states in pertinent part:

(1) There is levied a tax on the purchaser for the amount paid or charged for the following:

. . .

(n) tangible personal property stored, used, or consumed in this state.

The Utah Code does not specifically define �escrow fees� as either tangible or intangible property. However, the escrow fee paid by your customers is subject to Utah sales and use tax under certain circumstances. For example, charges for software support and maintenance are subject to Utah sales and use tax under Utah Code �59-12-103(1)(I). Furthermore, the Tax Commission has interpreted support and maintenance of �canned computer software� as a taxable service under Utah Admin. R. R865-19S-92(B). Therefore, if you include charges for software support and maintenance in the escrow fee charged to your customers, your company must collect and remit the Utah sales and use tax for that portion of the fee.

Conversely, if the escrow fee charged to your customers does not include charges for software support and maintenance, the escrow fee would resemble some of the types of intangible property included in Utah Code �59-12-102(18)(b). In such a situation, your customers would be purchasing an �intangible right� to the source code by paying the escrow fee. Therefore, the escrow fee would not be taxable and your company would not need to collect and remit the Utah sales and use tax for it.

Section 59-12-102(18)(b) states in pertinent part:

(b) �Tangible personal property� does not include:

. . .

(ii) bank accounts, stocks, bonds, mortgages, notes, and other evidence of debt;

(iii) insurance certificates or policies;

. . .

It is unclear from the information provided in your letter whether or not the escrow fee charged to your customers includes charges for software maintenance and support. If the fee does include such charges, then those charges are subject to Utah sales and use tax.

Please contact us again if you have further questions.

For the Commission,

Alice Shearer,

Commissioner