The transfer of computer programs and other miscellaneous computer services is an area that causes much confusion with regard to sales and use tax. Two basic distinctions should be made when determining the sales tax application in this area.

The first distinction is whether or not any tangible personal property is transferred. If, for example, a computer program is transferred solely through remote telecommunication lines (via modem) no tax would apply, as long as the purchaser does not obtain possession of any tangible storage media.

If a seller goes to the buyer's place of business, or the buyer goes to the seller's place of business to transfer the software to the buyer's computer tax applies to the charge, even though the customer never takes physical possession of the disk. The key to exclusion is that the transfer must be by remote communications.

The transfer of manuals or written documentation designed to facilitate the use of the non taxable program is likewise non taxable when there is no separate charge made to the purchaser. The seller, in this case, is the consumer and must pay tax on the cost of the manual. If a separate charge is made for the documentation, tax will apply to the amount charged.

The second distinction involves whether the true object of the contract is a service or a sale of tangible property. If the true object is a sale, all related services are usually taxable unless they are optional. Using this rationale as our starting point, specific applications follow:

Charges for processing customer furnished information (sales data, payroll data, etc.) are generally not subject to tax. Typical examples of this would include payroll service companies, as well as bookkeeping and accounting services.

"Processing of customer-furnished information" means the developing of original information from data furnished by the customer. Examples of automatic data processing processes which result in original information are summarizing, computing, extracting, sorting, and sequencing. Such processes also include the updating of a continuous file of information maintained by the customer with the data processing firm.

"Processing of customer-furnished information" does not include:

The using of a computer as a mere printing instrument, as in the preparation of personalized computer-printed letters, the mere converting of data from one medium to another, or an agreement under which a person undertakes to prepare artwork, drawings, illustrations or other graphic material whether the graphic material is transferred on storage media or otherwise. However, graphic material furnished incidentally to the performance of a service is not subject to tax. For example, graphics furnished in connection with the performance of architectural, engineering, accounting or similar professional services are not subject to tax.

Charges for training services (not in connection with a sale of tangible property) are non taxable but any charges for training materials are subject to tax.

The biggest area of confusion lies within distinguishing when certain computer programs are subject to tax and when the related consulting, training, and/or charges for updates are also taxable.

Sales (or leases) of custom computer programs are non taxable as the true object of the transaction is viewed more as a service than just the sale of tangible personal property. This is true even though the custom program is transferred on a disk, tape, CD rom or other form of tangible personal property. Likewise, charges to customize pre-written (canned) programs are also non taxable when separately stated. If not separately stated, the services are part of the sale of the canned program and the entire charge is taxable. In some cases, however, the customization is so significant that the canned program can change to a custom program making the program and all related services exempt. This will be the case if the new program sells for at least twice as much as the previous unmodified canned program.

Canned programs not significantly modified are taxable. Tax applies to the entire amount charged to the customer exclusive of separately stated testing and installation charges. If the amount charged includes a license fee, its also subject to tax.

Monthly charges for a software maintenance contract, which provides updates and future releases, is a contract for the sale of tangible personal property and is taxable. If maintenance cannot be acquired by the client without telephone support, the telephone support (consultation) is part of the gross receipts and is also subject to tax.

In summary, once a program is considered taxable, most services associated with it are also usually taxable. It may be cheaper to incur the cost of transferring programs by modem or significantly customizing programs (thereby making the transaction exempt) to save the sales tax.