State & Local Tax Blog

Missouri DOR Rules on Software Delivered Through “Load and Leave” Method

Back in October of 2010, we published an article entitled Missouri Policy on Software Load and Leave is Ruled Out Is Software Even Taxable in Missouri Now? The article was in response to an administrative hearings decision that held that software delivered through a “load and leave” method was not taxable because it was not tangible property.

But, as we said then, this decision seemed to throw the whole question out in the open. Is software even taxable at all regardless of how it is delivered? Is the means of delivery completely superfluous and is it all about the true object of the transaction? That certainly seems to be the reasoning underlying the ruling. Consider this: the AHC stated that while it was true that precedents from the Missouri Supreme Court have applied to sales of software, the prior cases did not squarely address the issue of whether software is tangible personal property. In fact, tellingly, the AHC compared the sale of software on a disk to the sale of a share of stock. The sale of stock is not taxed because it is intangible in nature. Yes, it is represented on some fancy parchment stock paper, but the value of the paper is inconsequential to the value of the ownership interest it represents. It could certainly be argued using the reasoning in this case that in Missouri all software is intangible by nature and whether it is transferred electronically, by load and leave, or by tangible medium does not matter.

We said this issued should be watched in Missouri. And we have been watching.

The Missouri Department of Revenue has now issued a detailed ruling outlining its policies on software. Unfortunately, they do not go as far as to conclude that all software is exempt because it is not tangible property, but they do affirm all other aspects of the administrative hearing referenced above. According to the DOR, the taxability of canned software depends totally on how it is delivered. If by tangible personal property that remains at the purchaser’s location, then it is taxable. Below is the entire text of the ruling for your reading pleasure.

We still believe that this distinction is shaky at best. In sales/use tax, form often trumps substance and we understand that. But this treatment by MO strains all credibility. For example, let’s say a company in MO buys 10,000 licenses to MS Office for use by its employees all over the world. According to this ruling, if the software is installed electronically on the company’s server in MO and then subsequently downloaded and installed by employees in and outside MO, no, MO tax is due. However, if even one CD is part of the “originally delivery” of the software, then all licenses would be taxable in MO. That seems to be a huge stretch. If this comes up on audit and an assessment is made, I would expect someone to fight this and the issue of whether software is even tangible property will be raised again.

For now, though, at least we have some definite policies on software taxability in Missouri. Here is the ruling in its entirety.

Letter Ruling No. LR 7001, Missouri, (Jan. 27, 2012)

LR 7001

Taxability of Canned Software, Custom Software, Software Licenses, Mandatory & Optional Maintenance Agreements, Non-Downloadable Software Kept by Vendor & Load and Leave

January 27, 2012

Dear Applicant:

This is a letter ruling issued by the Director of Revenue under Section 536.021.10, RSMo, and Missouri Code of Regulations 12 CSR 10-1.020, in response to your letter dated October 14, 2011.

The facts as presented in your letter ruling request, your previous letter, and through telephone conversations with Legal Counsel Eva Vlachynsky are summarized as follows:

Applicant purchases canned and customized software programs, licenses to use canned software programs, and mandatory and optional software maintenance and support for the software programs from a variety of vendors. Applicant purchases licenses to use original canned software programs that are downloaded to Applicant’s local servers electronically through the internet. In the alternative, Applicant sometimes purchases an original canned software program that is downloaded from a tangible format. Once a software program is downloaded onto Applicant’s local servers that are located in Missouri, the software is copied onto Applicant’s other computers electronically according to the number of licenses purchased by the Applicant.

The maintenance and support that Applicant purchases provide updates, upgrades, or modifications to the software programs. Certain vendors will include the mandatory maintenance and support for a set period of time with the Applicant’s software program purchase or license agreement. Support services provide the ability to speak with a representative via telephone or the ability to look up answers to a problem via website. Examples of maintenance and support materials are instruction manuals and troubleshooting information. Support service contracts may include software updates referred to as “patches.” Patches repair problems or allow additional functionality based upon problems with the software after its release date. Maintenance and support materials are distinguishable from any part of the actual software. The costs for the maintenance and support, whether mandatory or optional, are stated separately on the vendor’s invoice or are billed as a separate invoice.

Applicant also purchases access to non-downloadable software programs through vendors’ internet web sites. The non-downloadable software programs are not downloaded onto Applicant’s local servers in Missouri but are merely accessible for Applicant’s use via each vendor’s web site.

Occasionally, Applicant will enter into a single agreement to purchase several products. In these instances, some products are downloaded electronically through the internet and some are delivered in tangible format. The vendor will separately state each item on a single invoice.

ISSUE 1:

Are Applicant’s purchases of canned software downloaded electronically over the internet subject to sales or use tax?

RESPONSE 1:

No. Applicant’s purchases of canned software downloaded electronically over the internet are not subject to sales or use tax.

Section 144.020.1, RSMo, imposes a sales tax upon retail sales of tangible personal property and certain enumerated services. Section 144.610.1, RSMo, imposes a use tax “for the privilege of storing, using or consuming within this state any article of tangible personal property.” Missouri Code of State Regulations 12 CSR 10-109.050(1) provides that “the sale of canned computer software programs is taxable as the sale of tangible personal property.” A “canned program” is defined as a standardized program “purchased ‘off the shelf’” or is a program “of general application developed for sale to and use by many different customers with little or no modifications.” 12 CSR 10-109.050(2)(A). A computer program may be a canned program “even if it requires some modification, adaptation or testing to meet the customer’s particular needs.” Id.

Missouri Code of State Regulations 12 CSR 10-109.050(3)(A) further provides:

Tax applies to the sale of canned programs delivered in a tangible medium which are transferred to and retained by the purchaser. Examples of canned programs delivered in a tangible medium would include coding sheets, cards, magnetic tape, CD-ROM or other tangible electronic distribution media on which or into which canned programs have been coded, punched or otherwise recorded. 12 CSR 10-109.050(3)(A). If a purchaser does not receive a tangible medium of the original canned software, there is no sale of tangible personal property under Section 144.020, RSMo.

Here, the software is downloaded directly from the internet at the time of installation. Applicant never takes possession of any tangible personal property. Therefore, the purchase of the software downloaded electronically from the internet is not subject to sales or use tax.

ISSUE 2:

Are Applicant’s purchases of customized software programs downloaded by tangible format or electronically through the Internet subject to sales or use tax?

RESPONSE 2:

No. Applicant’s purchases of customized software programs downloaded by tangible format or electronically through the internet are not subject to sales or use tax. But purchases of canned software by tangible format that by has been adapted for Applicant’s use is not custom software and is subject to sales or use tax.

Missouri Code of State Regulations 12 CSR 10-109.050(1) provides:

In general, the sale of canned computer software programs is taxable as the sale of tangible personal property. The sale of customized software programs, where the true object or essence of the transaction is the provision of technical professional service, is treated as the sale of a nontaxable service.

Missouri Code of State Regulations 12 CSR 10-109.050(3)(C) provides:

Programming changes to a canned program to adapt it to a customer’s equipment or business processes, including translating a program to a language compatible with a customer’s equipment, are in the nature of fabrication or production labor that are a part of the sale and are taxable.

Here, if the software is custom software and not canned software that has been adapted for a customer’s use, whether Applicant purchases the customized software program in a tangible format or in an electronic format, the sale of customized software is treated as a nontaxable service. Therefore, Applicant’s purchases of customized software programs are not subject to sales or use tax.

ISSUE 3:

Are Applicant’s purchases of licenses to use canned software, when the original software was downloaded electronically through the internet to Applicant’s server and afterward individual users download copies based on the number of licenses purchased, subject to sales or use tax?

RESPONSE 3:

No. Applicant’s purchases of licenses to use canned software, when the original software was downloaded electronically through the internet to Applicant’s server and afterward individual users download copies based on the number of licenses purchased, are not subject to sales or use tax.

Missouri Code of State Regulations 12 CSR 10-109.050(3)(B) provides:

Tax applies to the entire amount charged to the customer for canned programs. Where the consideration consists of license fees or royalty payments, all license fees or royalty payments, present or future, whether for a period of minimum use or for extended periods, are includable in the measure of the tax.

License fees are taxable if the original purchase of the canned program was subject to sales or use tax. A purchase of canned software that is downloaded through the internet is not taxable. If Applicant purchases licenses to use canned software that was originally downloaded through the internet, the purchases are not subject to Missouri sales or use tax.

ISSUE 4:

Are Applicant’s purchases of mandatory software maintenance and support delivered electronically through the internet subject to sales or use tax if delivery of the initial software occurs electronically through the internet?

RESPONSE 4:

No. Applicant’s purchases of mandatory software maintenance and support delivered electronically through the internet are not subject to sales or use tax if delivery of the initial software occurs electronically through the internet.

Missouri Code of State Regulations 12 CSR 10-109.050(3)(E) provides:

Program installation, training, and maintenance of software services are taxable under the following circumstances:

1. The purchase of the services is mandatory under the terms of an agreement to purchase software[.]

Under the regulation, the Director assumes, if the original purchase of the software was subject to sales or use tax, then program installation, training, and maintenance of software services are taxable if these services are mandatory under the terms of the purchase agreement. Here, although Applicant’s purchases of the software maintenance and support are mandatory, the original software was not subject to tax because it was not purchased in a tangible format, but downloaded through the internet. Therefore, Applicant’s purchases of mandatory maintenance and support downloaded electronically are not subject to Missouri sales or use tax when the original software was downloaded electronically.

ISSUE 5:

Are Applicant’s purchases of optional software maintenance and support delivered electronically through the internet subject to sales or use tax if delivery of the initial software occurs electronically through the internet?

RESPONSE 5:

No. Applicant’s purchases of optional software maintenance and support delivered electronically through the internet are not subject to sales or use tax if delivery of the initial software occurs electronically through the internet.

Missouri Code of State Regulations 12 CSR 10-109.050(3)(F) provides:

Program installation, training and maintenance of software services are not taxable under the following circumstances:

1. The purchase of the services is not mandatory under a software purchase agreement and the services are separately stated on the purchase invoice from software or other items purchased; or

2. The services are purchased separately from software or other tangible personal property.

Applicant’s purchases of the software maintenance and support are optional. If an optional maintenance and support fee is separately stated on the invoice, it is not subject to sales or use tax. Applicant’s purchases of optional software maintenance and support downloaded electronically through the internet are not subject to sales or use tax when the initial software was downloaded electronically through the internet or if the optional software maintenance and support is separately stated on the invoice and does not include software updates.

ISSUE 6:

If Applicant purchases canned software originally delivered in electronic format, licenses to use the canned software, mandatory and optional maintenance and support with delivery of some items occurring in tangible form and delivery of others occurring electronically, which products are subject to sales or use tax when the vendor separately states each product on a single invoice?

RESPONSE 6:

Purchases of canned software delivered electronically, licenses to use canned software when the initial software was delivered electronically, and mandatory and optional maintenance and support delivered electronically when the initial software was delivered electronically are not subject to sales or use tax when the vendor separately states each product on a single invoice. See Responses 1, 3, 4, and 5. However, any portion of these items delivered in a tangible format will be subject to sales or use tax.

ISSUE 7:

If Applicant purchases canned software originally delivered in tangible format, licenses to use the canned software, mandatory and optional maintenance and support with delivery of some items occurring in tangible form and delivery of others occurring electronically, which products are subject to sales or use tax when the vendor separately states each product on a single invoice?

RESPONSE 7:

Purchases of canned software in a tangible format, licenses to use the canned software when the initial software was in a tangible format, and mandatory maintenance and support when the initial software was in tangible format are subject to sales or use tax when the vendor separately states each product on a single invoice. Optional maintenance and support is also subject to sales or use tax when the initial software was in a tangible format. See Responses 1, 3, 4, and 5.

ISSUE 8:

Are Applicant’s purchases of access to non-downloadable software housed on vendor internet web sites on servers located outside of Missouri subject to sales or use tax?

RESPONSE 8:

No. Applicant’s purchases of access to non-downloadable software housed on vendors’ Internet web sites on servers located outside of Missouri are not subject to Missouri sales or use tax if Applicant does not receive a tangible form of a software program that will allow it to access the non-downloadable software. See Response 1.

ISSUE 9:

Are Applicant’s purchases of software programs subject to sales or use tax when the programs are installed by the vendor using a tangible storage media at the Applicant’s web site and the tangible media is taken by the vendor after installation?

RESPONSE 9:

No. Applicant’s purchases of software programs are not subject to sales or use tax when the programs are installed by the vendor using a tangible storage media at the Applicant’s web site and the tangible media is taken by the vendor after installation.

Applicant does not take possession of any tangible media because the software is downloaded by the vendor from tangible media at the Applicant’s web site and the tangible media is taken by the vendor after installation. Therefore, the purchase of the software is not subject to sales or use tax. See Response 1.

This letter ruling is binding upon the Department of Revenue with respect to Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals. If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change. For this reason, the interpretation set forth above should be reviewed on a regular basis. Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.

Should additional information be needed, please contact Legal Counsel Eva Vlachynsky, General Counsel’s Office, Post Office Box 475, Jefferson City, Missouri 65105-0475 (phone 573-751-0961), or me.

Sincerely,

Alana M. Barragán-Scott

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