Which equipment, software, labor, shipping, installation, and training charges formed the Louisiana use-tax cost price of a communications system?

Plain-English summary

Louisiana use tax applied to the communications-system equipment, canned software, and required non-installation labor, but not to separately invoiced shipping and installation or optional training.

The purchaser imported equipment and prewritten software into Louisiana over six shipments. Title to equipment passed outside Louisiana, no other state tax had been paid, and the purchaser stored and installed the system in Louisiana.

Taxable components

Equipment and canned software

Both were tangible personal property used in Louisiana. The software consisted of prewritten modules combined to integrate the system, not software customized to the purchaser's special order.

Use tax applied to the lower of market value or cost price, which the ruling identified as the purchaser's cost.

Required non-installation labor

Initial design review, engineering, safety audits, project management, system tuning, and related travel were necessary to deliver a functional communications system. They were incidental to the sale and included in cost price.

Excluded components

Shipping

Common-carrier freight was severable from the property transfer and separately invoiced at final acceptance, so it was excluded.

Installation

Separately itemized installation labor and installer travel were excluded from cost price.

Optional training

The purchaser could receive a complete, working system without training and chose training so its own employees could maintain the system. The separately stated training, trainer travel, and training materials were optional and commercially severable, so they were excluded.

Approved accrual method

Use tax became due as each shipment was imported, used, stored, or consumed in Louisiana. The purchaser could remit equipment tax with each staged shipment and allocate previously paid required labor proportionally across the six shipments based on the value entering Louisiana.

Common questions

Q: Was canned software taxable?

A: Yes.

Q: Were engineering and project-management charges taxable?

A: Yes, because they were required and incidental to delivering the operational system.

Q: Were separately stated freight and installation taxable?

A: No, under the facts and authorities applied.

Q: Was optional training taxable?

A: No.

Q: Could tax accrue over the staged shipments?

A: Yes, including proportional required-labor amounts.

Citations and references

• La. R.S. 47:301(3)(a), (13)(a), (16)(h), (18)(a)(i), (22), and (23)
• La. R.S. 47:303(A)(2)
• LAC 61:I.4301.C — cost price
• South Central Bell v. Barthelemy, 643 So. 2d 1240 (La. 1994)
• Chicago Bridge and Iron Company v. Cocreham, 317 So. 2d 605 (La. 1975)
• Pensacola Construction Company v. McNamara (La. 1990)
• Owen Healthcare, Inc. v. Blank, 829 So. 2d 1149 (La. App. 3d Cir. 2002)
• Lake Charles Memorial Hospital v. Parish of Calcasieu, 728 So. 2d 454 (La. App. 3d Cir. 1998)
• LAC 61:III.101.C — Private Letter Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA PLR 04-006

Original ruling text

Private Letter Ruling 04-006
Redacted Version
Sales Tax—Items Included in Cost Price
September 7, 2004
This private letter ruling addresses what items of tangible personal property and services that are
part of a purchase of a communications system are included in cost price under La. Rev. Stat.
Ann. § 47:301(3)(a).
Facts
Company A and Company B entered into a communications system whereby Company A
contracted to purchase a fully-implemented communications system designed by Company B.
Full implementation of the system spans 31 months. The contract price breakdown provides:

1. Equipment and canned software
   Title to all equipment comprising the system passes to Company A upon shipment. No sales
   or use tax is paid to any other state on the equipment. The origin of the shipment of this
   equipment is from Company B’s out-of-state manufacturing facilities to a final shipping
   destination to one of two points in Louisiana: the location of Company B’s Louisiana
   installation sub-contractors or Company A’s warehouse in Louisiana. From these locations,
   the equipment is then transported to the applicable installation site.
   Company B’s software, which is installed into the communications equipment prior to the
   shipment of the tangible personal property from the out-of-state manufacturing facilities, is
   not prepared, created, adapted, or modified to meet any specific needs of Company A.
   Instead, the software transferred is comprised of prewritten modules, or programs, that are
   combined and installed to properly integrate the communications system. Ownership of the
   software does not pass to Company A. Instead, the company is granted a perpetual software
   license agreement, which allows Company A to use, but not own, the software. Additionally,
   no sales or use tax is paid to any other state on the transfer of the Company B software to
   Company A.
2. Shipping
   All equipment will be shipped by common carrier from Company B’s out-of-state
   manufacturing facilities into Louisiana. According to the terms set forth in section 5.3 of the
   Contract, all freight charges will be pre-paid by Company B and will be invoiced in a final
   statement to Company A at the completion of the system implementation. Title to the
   equipment and risk of loss for the equipment passes to Company A upon shipment. Company
   B will pack and ship all equipment in accordance with good practices.
3. Installation Labor
   All equipment installed at the master site and remote locations will be performed by
   Company B’s sub-contractors. Company A will assist with the equipment installation in
   vehicles. After installation, the equipment can be removed without permanent damage to it or
   617 North Third Street
   Baton Rouge, Louisiana 70802
   225-219-2780 ‚ 225-219-2759 Fax
   www.revenue.louisiana.gov

Revenue Ruling No. 04-006
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its surroundings. The charges for “installation labor” also include the travel costs for
installation personnel.

4. Non-installation Labor
   This category includes labor and travel costs for any Company B personnel or subcontractors to perform any of the following five activities not related to the installation of the
   system: initial design review, engineering, safety audits, project management, and system
   tuning performed by system technologists. These activities are necessary for a functioning
   communications system to be completed; they are not supplemental features that Company A
   can refuse to purchase.
   The initial design review charges relate to a meeting that included Company B's project
   manager and engineers and Company A's project team to review the design of the radio
   system and make any changes prior to manufacturing. Engineering charges are for Company
   B engineers working on and offsite to determine the specifications for Company A's system
   and to ensure that the system is performing satisfactorily. Safety audit charges relate to
   Company B subcontractors who perform audits at the primary site and each tower site to
   ensure that safety standards are met prior to the installation of any equipment. The charges
   for project management relate to Company B's project managers’ on and offsite labor and
   travel costs. The charges for system technologists relate to labor and travel costs for
   technologists who perform the tuning and optimization of the system at the various sites.
5. Training Costs
   The training costs relate to Company B providing “train the trainer” classes at various
   Company A locations. The training provided by Company B covers the operation and
   maintenance of the new system. The training was an optional feature of the negotiations, and
   Company B did not require training to be purchased as part of the sale. Because Company A
   has chosen to maintain the system once installed, the company decided to purchase this
   optional feature so its employees will be prepared to give proper support after system
   implementation. The fees for training include labor, travel, and material cost for providing
   training on Company B equipment.
   The contract between Company B and Company A requires a percentage down payment after the
   signing of the contract and another percentage payment at completion of the detail design
   review. These two payments were made in Month 3 and Month 4, four and three months,
   respectively, prior to the delivery of any tangible personal property into Louisiana.
   A total of six equipment shipments have been or will be made into Louisiana. The dates of the
   shipments are: Month 7, Month 8, Month 9, Month 13, Month 17, and Month 26. In the months
   following the importation of equipment into the state, Company A has or will pay use tax on the
   value of the equipment shipped into Louisiana during the previous month.
   Company A’s remittances in the months following the months in which equipment was imported
   into the state include the use tax that became due upon the use, consumption, distribution, and
   storage of the equipment within the state during the previous month. However, Company A’s
   remittances also include a second element, the use tax payments upon the sales of the non-

Revenue Ruling No. 04-006
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installation labor services, which were considered to be part of the cost price of the system, and
thus, taxable.
This second element is necessary to account for these taxable services for which Company B
received reimbursement but for which no use tax was remitted to the state at the point that the
payments were made. These payments occurred after the signing of the contract with Company
B and after completion of the detail design review but prior to the point that any equipment or
software had been shipped into the state.
To calculate this second element, Company A divides the value of the previous month’s
shipment by the total taxable amount1 to obtain a percentage of the total taxable amount to the
current invoice, to obtain the “percentage of taxable amount.” This percentage is then multiplied
by the value of the first three invoice payments for non-installation labor (Month 3, Month 4, and
Month 5) upon which tax was not remitted at the time that the contract payments were made.
As future shipments are received, Company A intends to accrue use tax based on this
methodology until tax has been accrued for all equipment imported into Louisiana, and tax on all
non-installation labor has also been remitted. Charges for installation will be separately invoiced.
Charges for shipping and training will be separately stated at final acceptance.
Ruling Requested
What are the sales and use tax consequences surrounding the Contract? Specifically, what are the
sales and use tax consequences for:
1.

Equipment and canned software

2.

Shipping charges

3.

Installation labor

4.

Non-installation labor

5.

Training charges

6.

Method of accruing taxes
Ruling

1. Equipment and canned software
   a.

Equipment
Ownership of all equipment for the communications system passed to Company A at a
point out-of-state, with no other jurisdiction collecting sales or use tax on the transfer of
the equipment. The equipment was shipped into the state of Louisiana and was
eventually transported and installed at the Louisiana sites.

1

The total taxable amount of the contract has been calculated by Company B and Company A to be approximately
85 percent of the total contract amount. This percentage has been calculated by determining that the taxable
components of the contract are equipment and software and non-installation labor. The remaining total contract
amount is composed of the following items, which were considered to be nontaxable: shipping, installation labor,
and training costs.

Revenue Ruling No. 04-006
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“Use” means and includes the exercise of any right or power over tangible personal
property incident to the ownership thereof. La. Rev. Stat. Ann. § 47:301(18)(a)(i). In the
situation at hand, Company A is exercising rights and powers over tangible personal
property by importing property into the state, storing it here, and directing its
installation at sites across the state. Due to its exercise of rights and powers over the
property, Company A owes a use tax on the equipment that it brings into the state of
Louisiana for use and consumption here. According to § 47:301(3)(a), the use tax due to
the state shall be assessed on the lower of the market value or cost price of the
equipment, which in this instance, is the cost price that Company A pays for the
equipment.
b.

Canned software
La. Rev. Stat. Ann. § 47:301(22) defines “computer software” as:
a set of statements, data, or instructions to be used directly or indirectly in a
computer in order to bring about a certain result in any form in which those
statements, data, or instructions may be embodied, transmitted, or fixed, by
any method now known or hereafter developed, regardless of whether the
statements, data, or instructions are capable of being perceived by or
communicated to humans. Computer software includes all types of software
including operational, applicational, utilities, compilers, and all other forms.
La. Rev. Stat. Ann. § 47:301(23) provides a definition of “custom computer software,”
as computer software that has been prepared, created, adapted, or modified to the
special order of a particular purchaser, licensee, or user.
The software installed by Company B onto the equipment prior to its shipment from the
out-of-state manufacturing facility was not prepared, created, adapted, or modified to
meet any specific needs of Company A. Instead, the software transferred was comprised
of prewritten modules, or programs, that are combined and installed to properly
integrate the communications system and provide certain features chosen by Company
A. Thus, because the Company B software was not customized under the provisions of
§ 47:301(23), it is “canned” computer software, which, under the decision South
Central Bell v. Barthelemy, 94-0499 (La. 10/17/94), 643 So.2d 1240, is tangible
personal property.2
“Use” means and includes the exercise of any right or power over tangible personal
property incident to the ownership thereof. Section 47:301(18)(a)(i). In the situation at
hand, Company A is exercising rights and powers over tangible personal property by
importing the software into the state, storing it here, and using it to operate the
communications system. Due to its exercise of rights and powers over the property,

2

The transfer of custom computer software was also classified as a transfer of tangible personal property, according
to South Central Bell v. Barthelemy. This treatment changed with the passage of Act 7 of the 2002 1st Extraordinary
Session, which amended the definition of tangible personal property in La. Rev. Stat. Ann. § 47:301(16)(h) to
provide a four-year incremental exclusion from the definition of tangible personal property for custom computer
software. (See Louisiana Revenue Ruling 02-008 for further explanation of the phase-in of the exclusion.)

Revenue Ruling No. 04-006
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Company A owes a use tax on the software that it brings into the state of Louisiana for
use and consumption here. According to § 47:301(3)(a), the use tax due to the state
shall be assessed on the lower of the market value or cost price of the equipment, which
in this instance, is the cost price that Company A pays for the software.

2. The shipping charges that are incurred for transporting tangible personal property from outof-state to a point within Louisiana and are separately itemized by Company B
   Section 47:301(3)(a) provides that the use tax due to the state shall be assessed on the lower
   of the market value or cost price of the equipment and software. The lower value in this
   situation is cost price and Company A is correctly calculating its use tax based on the “cost
   price” of the tangible personal property brought into the state.
   Section 47:301(3)(a) defines “Cost price” as:
   the actual cost of the articles of tangible personal property without any deductions
   therefrom on account of the cost of materials used, labor, or service cost, except
   those service costs for installing the articles of tangible personal property if such
   cost is separately billed to the customer at the time of installation, transportation
   charges, or any other expenses whatsoever, or the reasonable market value of the
   tangible personal property at the time it becomes susceptible to the use tax,
   whichever is less. (Emphasis added.)
   However, in both Chicago Bridge and Iron Company vs. Cocreham, 317 So. 2d 605 (La.
   1975), cert. denied, 424 U.S. 953 (1976) and Pensacola Construction Company v.
   McNamara, (La., 1990), the Louisiana Supreme Court held § 47:301(3)(a)’s imposition of
   use tax on transportation or freight charges unconstitutional because there is no parallel sales
   tax assessment in the statute defining sales price.
   Revenue Ruling No. 01-007 issued October 10, 2001, also reflects these court findings by
   describing that charges by a seller for transportation from the place of sale are excludible
   from both “sales price” and “cost price” if these charges to the buyer are optional and could
   be avoided by the buyer by making his own transportation arrangements. In other words, if
   the shipping forms an inseparable element of the sale of the tangible personal property, then
   the “sales price” or “cost price” will include these transportation charges.
   In the case at hand, title passes to Company A upon shipment by common carrier. Although
   Company B prepays freight charges, the freight charges are scheduled to be separately billed
   to Company A at the final acceptance invoice scheduled in Month 31. The shipping
   arrangements between Company A and Company B are severable charges from the transfer
   of the equipment. Therefore, the separately invoiced shipping charges do not comprise a
   portion of the “cost price” of the equipment imported and used within the state.
   3.

Installation labor to install items of tangible personal property
Installation labor that is separately billed to the customer at the time of installation does not
form a portion of the “cost price,” per § 47:301(3)(a). Similarly, § 47:301(13)(a) provides
that installation performed in conjunction with the sale of tangible personal property in
Louisiana will not comprise any portion of the sales price of the property sold.

Revenue Ruling No. 04-006
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In the case at hand, Company B sub-contractors install equipment in Louisiana at the master
site, repeater tower sites, dispatch sites, and within the vehicles. In addition, Company A
assists with the radio installation in the vehicles. To date, only one invoice, out of the eight
invoices provided, has included installation charges. This document shows a separate line
item charge for installation services provided at the master site. So long as all future
installation services are separately itemized in the invoices provided to Company A, then the
charges will not be included in the cost price of the equipment and canned software.
As provided in the statement of facts, the installation charges also include travel costs of
installation personnel. Section 47:301(3)(a) excludes all service costs related to installation
from the cost price of tangible personal property. Thus, the travel costs of installation
personnel would also comprise part of the “service costs” necessary for installing the
property and would also be excluded from the cost price.
4.

Non-installation labor
Section 47:301(3)(a) directs that materials used, labor, and service costs, except service
costs for installing the article of tangible personal property, are included in the cost price of
articles of tangible personal property. La. Reg. 61:I.4301.C. Cost Price— provides further
clarification of this provision:
d. In arriving at actual cost of tangible personal property for the purpose of the
required comparison (of reasonable market value versus actual cost price), all labor
and overhead costs which are billed to the purchaser of the property, except for
separately stated installation charges, are included. In the case of property
manufactured; fabricated and/or altered to perform a specific function prior to the
tax incident, every item of cost must be included. Thus, material, labor, overhead,
and any other cost of any nature whatsoever must be included. However; labor,
overhead, and other costs which represent services rendered to the property by the
owner or his employees are not to be included.… (Emphasis added.)
The emphasized language explains that when property is manufactured, fabricated, or
altered to perform a specific function, which is the situation with the communications
system purchased by Company A, then every service item necessary to complete the
manufacturing, fabrication, or alteration of the communications system must be included in
the cost price.
As pointed out in Chicago Bridge and Iron Company and Pensacola Construction
Company, the sales and use taxes are complimentary and the tax burden under each must be
uniform. The demarcation of which services are included or excluded from the “sales price”
will apply with equal force regarding which elements are included in “cost price.” Thus,
consideration of the provisions of the regulation quoted above, in addition to Louisiana
jurisprudence explaining the extent of which services are included in “sales price,” will
provide guidance in the situation at hand regarding the non-installation labor at issue.
In Owen Healthcare, Inc. v. Blank, 02-0530 (La. App. 3 Cir. 10/30/02), 829 So. 2d 1149,
and Lake Charles Mem'l Hosp. v. Parish of Calcasieu, 98-519 (La. App. 3 Cir. 12/9/98), 728
So. 2d 454, writ denied, 99-0071 (La. 3/12/99), 739 So. 2d 213, the Third Circuit Court of
Appeals provided parameters for deciding when services shall be included in the sales price.

Revenue Ruling No. 04-006
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The court stated that when the services are incidental3 to the sale of the property, they are
included in the sales price. Conversely, if the services are separate and distinct from the sale,
then the services are not part of the sales price.
According to the facts provided by Company A, the non-installation labor will be composed
of project managers, project implementation team members, and subcontractors, all of
whom are provided and coordinated by Company B. These Company B personnel and
subcontractors provide labor not related to the installation of the equipment.
These labor costs are properly included within the cost price because they represent part of
labor costs charged to the customer as part of the sale of the communications system. Page
two of the document entitled “Communications System Agreement” defines “system” as the
equipment, software, and services combined together; thus, the item that has been
transferred is an operational system, including the services necessary to make that system
functional.
The five non-installation services are incidental to the sale of the system and are included in
the cost price. In addition, these charges include travel costs of the Company B personnel
and subcontractors and the expenses for safety audits of the sites. Because § 47:301(3)(a)
includes all service costs (excluding installation) within the cost price of tangible personal
property, the travel costs of Company B personnel and subcontractors providing noninstallation labor would also be taxable.
5.

Training Methods
Company B’s training services are an optional element of the contract. Company A is not
obligated to purchase training, although Company B is the only company able to offer
training on its own equipment. Company A was able to choose from a variety of training
packages and only chose training relating to the operation and maintenance of the system.
The training was necessary primarily due to the fact that Company A has chosen to maintain
its system and therefore needed its employees to be educated in order to provide proper
support.
The charges by Company B are for labor charges for Company B trainers and the travel
costs for the trainers. Additionally, training material costs related to the training manuals
used in classes are also included in the training charges.
Because a purchaser of a Company B communications system receives a fully operational
and functional system without the training services and a purchaser is not obligated to
contract for training, the training costs represent optional services that are separate and
distinct from the sale of the communications system.
As provided in La. Reg. 61:I.4301.C. Cost Price—d. “…In the case of property
manufactured; fabricated and/or altered to perform a specific function prior to the tax
incident, every item of cost must be included…” In this instance, the completion and final
implementation of the system will still take place even without the training. Separately
stated charges for personnel training are commercially severable charges because the

3

Webster’s New Universal Unabridged Dictionary 654 (2d ed. 1983) defines “incidental” as “1. occurring or likely
to occur as an unpredictable or minor concomitant. 2. of a minor, casual, or subordinate nature ….”

Revenue Ruling No. 04-006
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equipment and activities necessary to bring the equipment to the market and make the
equipment operational for the purchaser are separate from the training services that
Company A purchases at its own discretion and option. Thus, the training charges and travel
costs for the trainers are not part of the cost price and are not subject to the use tax.
6.

Method of Accruing use taxes on equipment shipped into Louisiana
Section 47:301(3)(a) provides that “the use, or consumption, or distribution, or storage to be
used or consumed in this state of tangible personal property, shall each be equivalent to a
sale at retail, and the tax shall thereupon immediately levy and be collected in the manner
provided herein, provided there shall be no duplication of the tax in any event.” Because the
use tax is levied at the instant the use, consumption, distribution, or storage to be used or
consumed in this state of tangible personal property occurs, the use tax is not payable until
one of these events triggers the levy of the tax.
Company A’s six monthly remittances in Months 7, 8, 9, 13, 17, and 26 have included or
will include two elements: first, the use tax that is due upon the use, consumption,
distribution, and storage of the equipment within the state and second, the use tax payments
upon the sales of non-installation services that are incidental to the sale of the
communications system.
As for the first element, Company A’s method of remitting the use tax upon the value of the
equipment imported into the state as it is brought into the state is in compliance with the
method of collection provided in § 47:303(A)(2). The use tax is levied upon the equipment
as each item is imported during the six separate shipments and Company A’s remitting of
the use tax in the month following the importation of the tangible personal property is
correct.
The second remittance amount is necessary to account for the percentage payment made
after the signing of the contract and the percentage payment made at the completion of the
detail design review. These payments were made prior to the use tax becoming due with the
first shipment of property into the state in Month 7. These charges relate to non-installation
labor, which as discussed above, are incidental to the transfer of the system and are included
in the cost price.
Company A’s plan to remit use tax upon the value of the incidental services previously
rendered and paid at the outset of the communications system contract signing and design is
in compliance with the method of collection provided in § 47:303(A)(2). The statute
provides for the levy of the tax upon the use, or consumption, or distribution, or storage to
be used or consumed in this state of tangible personal property. Thus, the levy attaches upon
the use of tangible personal property within the state. Since the incidental services rendered
prior to the importation apply to the design, engineering, and management of the entire
communications system, and not any one piece of equipment, it is appropriate to
proportionally assign the value of the non-installation labor to the value of the equipment
along with the accrual of the use tax upon each of the six monthly installments.
Company A proportionally assigned the value of the non-installation labor to the value of
the equipment to each of the six monthly installments through the use of a fraction, the
“percentage of taxable amount,” whose numerator is the previous month’s shipment and

Revenue Ruling No. 04-006
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whose denominator is the total cost price amount of equipment shipped into the state. This
method for dividing the non-installation labor equally among the six equipment use tax
remittances brings Company A in compliance with the provisions of § 47:303(A)(2). To
otherwise determine that the entire levy upon all of the incidental services attaches at the
moment the first item of equipment is imported into the state, regardless of the value of that
equipment, would not recognize the contributions that the non-installation labor provides to
the overall success of the entire communications system. Since the equipment is shipped and
enters the state in stages and the use tax is due upon the tangible personal property in stages,
so does the accrual of the use tax upon the non-installation labor become due, proportionate
to the cost value of the equipment that has entered the state.
Summary
In conclusion, Company A is exercising rights and powers over the equipment and software used
and consumed within the state, and Company A is correctly accruing use tax upon the cost price
paid for these articles of tangible personal property in the month following the importation of the
property into the state. Additionally, the five non-installation services included under the
category “non-installation labor” are incidental to the sale of the system and are included in the
communication system’s cost price.
The shipping charges for transporting the equipment via common carrier into the state will not be
part of the “cost price” because they will be separately invoiced on the final invoice. Similarly,
so long as the installation charges for installing the equipment at the Louisiana sites are
separately invoiced, these charges will not comprise a portion of the “cost price.” Also not
included within the “cost price” are the training costs paid for Company B training on the
communications system; these charges represent optional services that are separate and distinct
from the sale of the communications system.
Finally, Company A’s six monthly remittances properly include two elements: first, the use tax
that is due upon the use, consumption, distribution, and storage of the equipment within the state
and second, the use tax payments upon a percentage of the sales of non-installation services that
are incidental to the sale of the communications system.
If you have any questions or need additional information, please contact the Policy Services
Division at 225.219.2780.
Sincerely,
Cynthia Bridges
Secretary
By:

Christina Fletcher Loftus
Attorney
Policy Services Division

A Private Letter Ruling (PLR) is issued under the authority of LAC 61:III.101.C. A PLR provides guidance to a specific
taxpayer at the taxpayer’s request. It is a written statement issued to apply principles of law to a specific set of facts
or a particular tax situation and is limited to the matters specifically addressed. A PLR does not have the force and
effect of law and may not be used or cited as precedent. A PLR is binding on the Department only as to the taxpayer
making the request and only if the facts provided with the request were truthful and complete and the transaction was
carried out as proposed. The Department’s position concerning the particular tax situation addressed remains in
effect for the requesting taxpayer until a subsequent declaratory ruling, rule, court case, or statute supersedes it.