How did South Carolina classify tangible and electronic software, ASP access, and software maintenance under RR 03-5?

Plain-English summary

South Carolina Revenue Ruling #03-5 provided a broad framework for software sales, application-service-provider access, computer systems, and software maintenance.

Software delivered by tangible means—including disk, tape, a seller's laptop, or “load and leave” media—was taxable. Software delivered completely electronically from a remote location was generally nontaxable when no disk, tape, backup, patch, or later release was supplied tangibly.

The ruling treated access to software hosted on an application service provider's website differently from a delivered software copy. ASP access was a taxable communication service similar to database access.

Maintenance bought with tangibly delivered software was taxable as part of the sale. A later or separate maintenance contract depended on its true object: tangible software updates pointed toward tax, while telephone assistance and other services pointed away from tax.

RR 11-2 later reinstated RR 03-5 for transactions on or after September 1, 2011, but RR 12-1 expressly modified its electronic-delivery analysis.

What this means for you

Software vendors

Document exactly how every copy, backup, update, and patch reaches the customer. Delivery method and contractual promises can change the result.

SaaS and hosted-application providers

The ruling did not treat hosted access like an electronically delivered copy. Customers accessing software on the provider's website were buying taxable communications under this framework.

Software buyers and tax professionals

Separate the software license, hardware, delivery, installation, support, updates, and later renewals. A single negotiated computer system could remain one taxable transaction despite separate contracts and invoices.

Common questions

Q: Was software delivered on a disk taxable?
A: Yes, including canned, customized, modified, and load-and-leave software delivered by tangible means.

Q: Was a remote electronic download taxable?
A: Generally no under the ruling when no part of the software, backup, or update was delivered tangibly; RR 12-1 later modified the electronic-delivery analysis.

Q: Was hosted ASP access exempt as software?
A: No. The ruling treated access to software on the provider's website as taxable communications.

Q: Were all maintenance contracts taxable?
A: No. Timing and true object mattered, and RR 11-2 later changed the rule for contracts purchased after the software.

Citations and references

• S.C. Code Ann. §§ 12-36-910 and 12-36-1310 — sales and use tax
• S.C. Code Ann. § 12-36-60 — tangible personal property
• S.C. Code Ann. §§ 12-36-910(B)(3) and 12-36-1310(B)(3) — communications charges
• S.C. Code Ann. §§ 12-36-90 and 12-36-130 — gross proceeds and sales price
• S.C. Regulation 117-330 — automatic data processing
• SC Revenue Ruling 11-2 — reinstated RR 03-5 and superseded RR 05-13
• SC Revenue Ruling 12-1 — expressly modified RR 03-5

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: RR03-5.pdf
• Official reinstating RR 11-2 PDF: RR11-2.pdf
• Official modifying RR 12-1 PDF: RR12-1.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214
Website Address: http://www.sctax.org

SC REVENUE RULING #03-5

SUBJECT:

Software
(Sales & Use Tax)

EFFECTIVE DATE:

Applies to all periods open under the statute.

SUPERSEDES:

All previous advisory opinions and any oral directives in conflict
herewith.

REFERENCES:

Chapter 36 of Title 12 (2000 and Supp. 2001)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (Supp. 2001)
SC Revenue Procedure #03-1

SCOPE:

The purpose of a Revenue Ruling is to provide guidance to the public
and to Department personnel. It is a written statement issued to apply
principles of tax law to a specific set of facts or a general category of
taxpayers. A Revenue Ruling does not have the force or effect of law,
and is not binding on the public. It is, however, the Department’s
position and is binding on agency personnel until superseded or modified
by a change in statute, regulation, court decision, or advisory opinion.

INTRODUCTION:
Technology has progressed to the stage that computer software may be sold or provided in many
forms. Software may be sold in traditional forms such as on computer diskettes or magnetic.
Computer software may also be sold and delivered electronically as described in the following
transaction. Company A purchases computer software for its own business use. No portion of
the computer software will be delivered on computer disks or magnetic tapes. Instead, the
software will be electronically delivered from a remote location to Company A in South Carolina
via a modem and telephone line.
In addition, some Internet websites also allow a customer use of software on that website.
Companies that provide customers access or use of software in this manner are generally referred
to as Application Service Providers (ASP).
Finally, when computer software is purchased or a license to use software is granted, the
purchasers or licensees may enter into agreements for the maintenance or support of the
software. These agreements generally entitle the purchasers or licensees to one or more of the
following benefits:
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1. Telephone assistance on standby or during certain hours.

2. Updated or new versions of the software as they become available.
3. Coding or modifications to fit specific hardware needs.
4. Debugging of programs or correction of errors.
5. Training concerning use of the software.
6. Installation of the software.
   In addition to the various benefits that may be available through software maintenance or support
   agreements, diverse conditions exist in conjunction with the terms of these agreements. For
   instance, some agreements are entered into when the software is purchased or a license to use is
   granted and others are entered into some later time; some agreements are optional while other
   agreements are mandatory; etc.

LAW AND DISCUSSION:
Computer Software Sold and Delivered by Tangible Means
Code Section 12-36-910(A) states:
A sales tax, equal to five percent of the gross proceeds of sales, is imposed upon every
person engaged or continuing within this State in the business of selling tangible
personal property at retail. (Emphasis added.)
Code Section 12-36-1310(A) reads:
A use tax is imposed on the storage, use, or other consumption in this State of tangible
personal property purchased at retail for storage, use, or other consumption in this State, at
the rate of five percent of the sales price of the property, regardless of whether the retailer
is or is not engaged in business in this State. (Emphasis added.)
In Citizens and Southern Systems, Inc. v. South Carolina Tax Commission, 280 S.C. 138, 311
S.E.2d 717 (1984), the Supreme Court of South Carolina determined that computer software sold
and delivered to the purchaser by means of magnetic tape was tangible personal property and
subject to the State's sales and use taxes.
Regulation 117-330, "Automatic Data Processing" states, in part:

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Prewritten Programs - The tax applies to total charges for coding, punching or otherwise
reproducing prewritten programs including charges for the tapes or other properties when
furnished by the seller or producer.
The temporary transfer of possession of a program for a consideration for the purpose of
direct use by the customer or to be reproduced by the customer on or into tapes or other
properties is a lease of tangible personal property subject to the tax on the total amount
paid even though the consideration may be labeled a license fee or royalty payment; and
even though royalty payments or payments for a license to use may be paid long after the
original programs are returned to the seller.
Custom Programs - Custom programs are programs prepared to the special order of a
customer, the gross proceeds therefrom being subject to the tax. Also considered to be
custom programs are sales of programs developed through modification of existing
prewritten programs to meet a customer's specific needs. Charges to modify and adapt
these programs to a customer's equipment (including testing) or translating a program to a
language compatible with a customer's equipment are services that are a part of the sale
price of tangible personal property and likewise subject to the tax.
In summary, computer software sold and delivered to a purchaser by tangible means, such as by
magnetic tape or on a disk, is a sale subject to the sales or use tax.
Computer Software Sold and Delivered by Electronic Means
Code Section 12-36-60 defines the term "tangible personal property" to mean:
...personal property which may be seen, weighed, measured, felt, touched, or which is
in any other manner perceptible to the senses. It also includes services and intangibles,
including communications, laundry and related services, furnishing of accommodations
and sales of electricity, the sale or use of which is subject to tax under this chapter and
does not include stocks, notes, bonds, mortgages, or other evidences of debt. (Emphasis
added).
Therefore, the term tangible personal property includes the sale or use of intangibles, including
communications, that are subject to South Carolina sales or use taxes under Chapter 36 of Title
12.
Communications are subject to sales and use taxes under Chapter 36 of Title 12 pursuant to Code
Sections 12-36-910(B)(3) and 12-36-1310(B)(3), which impose the tax on the:
gross proceeds accruing or proceeding from the charges for the ways or means for the
transmission of the voice or messages, including the charges for use of equipment
furnished by the seller or supplier of the ways or means for the transmission of the voice
or messages …. (Emphasis added.)

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For the electronic delivery of software to be subject to sales and use taxes, it must be determined
that the gross proceeds are derived from the sale of tangible personal property as defined in Code
Section 12-36-60. The term tangible personal property includes services and intangibles, such as
communications, which are subject to tax under Code Sections 12-36-910 and 12-36-1310.
A review of longstanding administrative policy indicates that computer software sold and
delivered in the form of a computer diskette or magnetic tape is tangible personal property
subject to taxation. See Citizens and Southern Systems, Inc. v. South Carolina Tax Commission,
280 S.C. 138, 311 S.E. 2d 717 (1984) and also SC Revenue Ruling #93-4.
In addition, it has been the longstanding policy of the Department that computer software sold
and delivered by electronic means is an intangible and is subject to taxation only if it is
"communications" taxed under Chapter 36 of Title 12 pursuant to Code Sections 12-36-910 and
12-36-1310 or if any portion of the software is delivered by tangible means (e.g., back-up disks
or tapes).
The Code does not provide definitions for various terms or phrases found in Code Sections
12-36-910(B)(3) and 12-36-1310(B)(3); therefore, it is necessary to determine their "ordinary
and popular meaning." The Department, in interpreting Code Sections 12-36-910(B)(3) and 1236-1310(B)(3) (and their predecessors), has long used the definitions found in the Second
College Edition of the American Heritage Dictionary for defining these terms and phrases.
Substituting the definitions in the Second College Edition of the American Heritage Dictionary
for terms found in Sections 12-36-910(B)(3) and 12-36-1310(B)(3), the literal meaning becomes

• the total amount of money derived, exclusive of deductions, from a commercial venture and
  accruing or proceeding from charges for the manner, method or instruments for sending a signal
  of the voice or of messages is subject to the sales and use tax. See SC Revenue Ruling #89-14.
  Furthermore, the definition of tangible personal property, as defined in Code Section 12-36-60,
  includes services and intangibles "the sale or use of which is subject to tax under [Chapter 36],”
  such as "communications." The Second College Edition of the American Heritage Dictionary
  defines "communication,” in part, as "[t]he exchange of thoughts, messages or information, as by
  speech, signals or writing." "Communications" is defined, in part, as, "a means of
  communicating esp.: a system of sending and receiving messages, such as mail, telephone and
  television." As with the above definitions, the Department has long used the definition found in
  the Second College Edition of the American Heritage Dictionary for the term “communications.”
  Based on the above discussion, it is the Department’s position that charges for the ways or means
  of communication include charges for access to, or use of, a communication system (the manner,
  method or instruments for sending or receiving a signal of the voice or of messages), whether
  this charge is based on a fee per a specific time period or per transmission. This is further
  supported by the definition of the terms "sale" and "purchase," which are defined in Code
  Section 12-36-100 to include "a license to use or consume." Therefore, the gross proceeds
  accruing or proceeding from the charges for access to, or use of, a telephone system is subject to
  the tax.

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The Department of Revenue has taxed communication services such as telephone services,
facsimile transmission services, database access transmission (legal research, stock quotes, credit
reporting), and electronic voice mail services. All of these communication services and others
currently taxed by the Department of Revenue constitute communication systems that the
purchaser pays to access or use. (See Commission Decision #89-77 and SC Revenue Ruling

89-14.)

In addressing whether the computer software is a "communication", it must be determined
whether the purchaser of computer software that is sold and delivered by electronic means is
paying for access or use of the communication system (e.g. the telephone). Applying the "true
object test" provides guidance in making this determination. In this instance, the true object of
the sale of computer software electronically delivered, as described in the facts, is the sale of the
intangible software: the "true object" is not the access or use of the communication system. To
conclude otherwise stretches the statutory language. Accordingly, computer software sold and
delivered by electronic means, as described in the facts, does not meet the definition of tangible
personal property set forth in Code Section 12-36-60 or fall within the provisions of Code
Section 12-36-910 or Code Section 12-36-1310 and is therefore not subject to the sales and use
tax.
Computer Software Provided through an Application Service Provider
Code Sections 12-36-910(B)(3) and 12-36-1310(B)(3) impose the sales and use tax upon:
the gross proceeds accruing or proceeding from the charges for the ways or means for
the transmission of the voice or of messages, including the charges for use of equipment
furnished by the seller or supplier of the ways or means for the transmission of the voice
or of messages ….
The term "tangible personal property", as used in Chapter 36, is defined at Code Section
12-36-60, in part, as "personal property which may be seen, weighed, measured, felt, touched or
which is in any other manner perceptible to the senses." The next sentence of that section reads
in part:
It also includes services and intangibles, including communications, laundry and related
services, furnishing of accommodations and sales of electricity, the sale or use of which
is subject to tax under this chapter .… (Emphasis added.)
The statute provides several exemptions and exclusions for the charges taxed under Sections
12-36-910(B)(3) and 12-36-1310(B)(3).
Code Section 12-36-2120(11) exempts:
(a) toll charges for the transmission of voice or messages between telephone exchanges;
(b) charges for telegraph messages;

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(c) carrier access charges and customers access line charges established by the Federal
Communications Commission or the South Carolina Public Service Commission;
and
(d) transactions involving automatic teller machines;
Code Section 12-36-60, the definition of “tangible personal property” which by statute includes
communications, states in part:
Tangible personal property does not include the transmission of computer database
information by a cooperative service when the database information has been assembled
by and for the exclusive use of the members of the cooperative service.
Code Section 12-36-910(C) states:
Notwithstanding any other provisions of this article or Article 13, Chapter 36 of this title,
the sales or use tax imposed by those articles does not apply to the gross proceeds
accruing or proceeding from charges for or use of data processing. As used in this
subsection, “data processing” means the manipulation of information furnished by a
customer through all or part of a series of operations involving an interaction of
procedures, processes, methods, personnel, and computers. It also means the electronic
transfer of or access to that information. Examples of the processing include, without
limitation, summarizing, computing, extracting, storing, retrieving, sorting, sequencing,
and the use of computers.
In Revenue Ruling #89-14, the Department determined that certain communication services fall
within the provisions of Code Sections 12-36-910(B)(3) and 12-36-1310(B)(3) for sales and use
tax purposes. One of the services held subject to the tax was "Database Access Transmissions",
which the department defined as:
Transmission of computer database information and programs by and through a modem
and telephone lines, whether automatically transmitted or transmitted as a result of a
subscriber accessing a computer. Charges may be based on the amount of time the
transmission is utilized.
Based on the above, charges by the Application Service Provider are similar to charges by
database access services and are therefore subject to the sales and use tax under the provisions of
Code Sections 12-36-910(B)(3) and 12-36-1310(B)(3). Finally, the Application Service Provider
is not charging “for … data processing” as defined in Code Section 12-36-910(C).
Charges for Maintenance Contracts Made in Conjunction With the Sale of Computer Software
Having established that the sale or purchase of computer software delivered by tangible means is
subject to the sales or use tax, we must next examine whether charges associated with the
acquisition of software delivered by tangible means are taxable (i.e., maintenance agreements).

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The sales tax is imposed upon a retailer's "gross proceeds of sales" which is defined at Code
Section 12-36-90, in part, as:
...the value proceeding or accruing from the sale, lease, or rental of tangible personal
property... without any deduction for... the cost of materials, labor, or service... [or] any
other expenses....
The use tax is based upon the "sales price" of tangible personal property. The term "sales price"
is defined at Code Section 12-36-130, in part, as:
...the total amount for which tangible personal property is sold, without any deduction for
the cost of the property sold, the cost of the materials used, labor or service cost, interest
paid, losses, or any other expenses.
(1) The term includes:
(a) any services or transportation costs that are a part of the sale, whether
paid in money or otherwise;...
In Meyers Arnold, Inc. v. South Carolina Tax Commission, 285 S.C. 303, 328 S.E.2d 920, 923
(1985), the Court of Appeals of South Carolina held the element of service involved in a lay
away sale was subject to tax as being part of the sale of tangible personal property. The test used
by the court was as follows:
...But for the lay away sales, Meyers Arnold would not receive the lay away fees. The
fees are obviously charged for the service rendered in making lay away sales. For these
reasons, this court holds the lay away fees are part of the gross proceeds and subject to
the sales tax.
Accordingly, the total amount charged in conjunction with the sale or purchase of tangible
personal property is subject to the tax.
A similar conclusion was reached in Regency Towers Association, Inc. v. South Carolina Tax
Commission, 88-CP-26-1109 (1989), where the Horry County Court of Common Pleas held
charges for maid service were not deductible from gross proceeds derived from charges for
accommodations. More recently, in Commission Decision #92-37, the Commission held that
charges for maid services, which were optional, were a part of the accommodations furnished to
transients and therefore subject to the accommodations tax.
In Commission Decision #90-38, the Commission held that charges for engraving services, even
though optional, were a part of the sale of plaques and trophies by the retailer and includible in
gross proceeds of sales. The decision states, in part:
...We find and conclude that here the "engraving charges" are part of the sale of tangible
personal property since the customer is not seeking a professional service but is seeking
an engraved trophy or plaque....

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****
...The Courts have held that although the amount of materials used may be
inconsequential with respect to the labor involved where the customer seeks to purchase
custom made or designed tangible personal property, the artistic skill of the craftsman is
a part of the sales price of the product and is inextricably linked....
In addition, Regulation 117-318.1, entitled "Warranties", provides further guidance and reads, in
part:
On all sales of tangible personal property which include a charge for warranty which is a
part of the sales price of the property, such warranty charges are to be included in the
measure of the tax, even though said warranty charges may be billed separately from the
price of the merchandise.
Warranty contracts entered into subsequent to the sale of tangible personal property and
which are separate and distinct from the sale, and for which a separate and distinct
charge is made are not to be included in the measure of the tax....
In summary, charges for maintenance agreements (whether optional or mandatory) that are made
in conjunction with, or as part of the sale of, computer software delivered by tangible means are
includable in "gross proceeds of sales" or "sales price", and, therefore, subject to the tax.
Maintenance Contracts Not Sold in Conjunction with Computer Software
The above discussion concerns maintenance contracts that are sold in conjunction with the sale
of software delivered by tangible means. However, we must also consider sales of maintenance
contracts that are not made in conjunction with the sale of software delivered by tangible means
(e.g. contracts sold by a third party and contracts sold at a later date). In such cases the question
often arises as to whether one is selling a service or tangible personal property. Typically, such
contracts provide software updates, technical support, on-site modifications, etc.
In Commission Decision 89-1, the Commission considered whether charges for a digital data
tape, which when applied to the appropriate computer system would produce maps, were subject
to use tax. In reaching its conclusion that the charges were subject to tax, the Commission stated:
...Here the facts demonstrate that the true object of the subject transaction was to obtain
the digital data tape and base maps both of which are tangible personal property....
In Richland County v. South Carolina Tax Commission, 82-CP-40-2143 (1983), the Richland
County Court of Common Pleas held that tax map sheets made and delivered by a third party did
not represent a personal service transaction, but were the "saleable product" of the third party's
skill and therefore subject to the use tax.
In summary, if the true object of a particular transaction is to acquire or to use tangible personal
property, the transaction is subject to tax. The measure of the tax being the entire amount

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charged for the contract. If the true object of a particular transaction is to acquire a service, as
opposed to tangible personal property, the transaction is not subject to tax.
Therefore, maintenance contracts that are not sold in conjunction with the sale of computer
software may or may not be subject to the sales or use tax. In determining whether or not a
contract is taxable, the true object of the contract must be established. If the true object of a
contract is to acquire tangible personal property (e.g. software updates), the total charges for the
contract are taxable, even though certain services are also provided. If the true object is to
acquire services (e.g. telephone assistance), then the total charges are not taxable, even though
certain tangible personal property is also provided.
An Example of When the True Object of a Contract is the Sale of Tangible Personal Property:
The true object of a particular contract is to sell software, and the transaction is subject to tax,
where:

1. the contract provides for the purchaser to receive software updates delivered by tangible
   means;
2. there is no additional charge to the customer for the updates; and
3. the original software is obsolete without the updates (e.g. an income tax preparation
   program).
   While a contract is taxable if all the above are met, absence of one or more of the criterea does
   not establish that a contract is for the sale of services, as opposed to software. In such cases, all
   the facts and circumstances should be considered before concluding that a particular contract is
   not taxable

QUESTIONS AND ANSWERS:
Software Delivered by Tangible Means

1. Is “canned” software sold and delivered by tangible means, such as a tape or a diskette, subject
   to the sales and use tax?
   Yes.
2. Is “customized” software sold and delivered by tangible means, such as a tape or a diskette,
   subject to the sales and use tax?
   Yes.
3. If “canned” software is modified and sold and delivered by tangible means, such as a tape or a
   diskette, is the additional charge for modifying the “canned” software subject to the sales and use
   tax?

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Yes. For example, if “canned” software that is normally sold for $500.00 is modified for an
additional $200.00, then the total charge of $700.00 is subject to the sales and use tax.

4. If software is sold and delivered by a “load and leave” method whereby the seller personally
   brings the software to the buyer’s location on a diskette, inserts the disk into the buyer’s
   computer to download the software into computer, and then removes the diskette and takes it
   with him when he leaves, is the sales transaction subject to the tax?
   Yes. The sale of software delivered by a tangible means, the diskette, constitutes the sale of
   tangible personal property subject to the tax.
5. If software is sold and delivered by a “load and leave” method whereby the seller personally
   brings the software to the buyer’s location on a laptop computer, connects the laptop with the
   buyer’s computer with a cable in order to download the software into computer, and then
   disconnects the computers and takes the laptop with him when he leaves, is the sales transaction
   subject to the tax?
   Yes. The sale of software delivered by a tangible means, the laptop computer, constitutes the sale
   of tangible personal property subject to the tax.
6. If software is sold and delivered in a method described in Questions #4 and #5 above, are
   separately listed charges on the bill to the customer for delivery, hotel accommodations, and
   other fees associated with the cost of having the seller’s employee personally deliver the
   software subject to the sales and use tax?
   Yes. Charges for delivery, hotel accommodations, and other fees associated with the cost of
   having the seller’s employee personally deliver the software are a part of “gross proceeds of
   sales” or “sales price” and subject to the tax. See Code Sections 12-36-90 and 12-36-130.
   Note: Charges for installation (not delivery charges) incident to the sale of tangible personal
   property are not subject to the sales or use tax when such charges are separately stated from the
   sales price of the property on billing to customers and provided the seller's books and records of
   account show the reasonableness of such labor in relation to the sales price of the property. See
   SC Regulation 117-313.3.
   Software Delivered by Electronic Means from a Remote Location
7. Is “canned” software sold and delivered by electronic means via a modem and telephone line
   from a remote location subject to the sales and use tax?
   Software sold and delivered by electronic means via a modem and telephone from a remote
   location is not subject to the sales and use tax, provided no part of the software, including backup diskettes and tapes, is delivered by tangible means.
8. Is “customized” software sold and delivered by electronic means via a modem and telephone
   line from a remote location subject to the sales and use tax?

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Software sold and delivered by electronic means via a modem and telephone from a remote
location is not subject to the sales and use tax, provided no part of the software, including backup diskettes and tapes and prewritten maintenance repairs or patches, is delivered by tangible
means.

9. If software is sold and delivered to the customer by electronic means via a modem and
   telephone line from a remote location, and no part of the software, including back-up diskettes
   and tapes, is delivered in a tangible form, is the transaction subject to the sales and use tax if
   written documentation or publications are provided in tangible form?
   No.
10. If software is sold and delivered to the customer by electronic means via a modem and
    telephone line from a remote location, and no part of the software, including back-up diskettes
    and tapes, is delivered in a tangible form in the initial transfer, is the transaction subject to the
    sales and use tax if under the contract the seller is obligated to restore the customer’s “crashed”
    computer with replacement software (the same software originally delivered by electronic
    means), and the contract does not specify whether the restoration will be performed by electronic
    or tangible means?
    No.
11. If software is sold and delivered to the customer by electronic means via a modem and
    telephone line from a remote location, and no part of the software, including back-up diskettes
    and tapes, is delivered in a tangible form, is the transaction subject to the sales and use tax if the
    seller provides an employee on-site at the customer’s location to execute, or assist in executing,
    the remote electronic download and installation of the software?
    No.
12. If software is sold and delivered to the customer by electronic means via a modem and
    telephone line from a remote location, is the transaction subject to the sales and use tax if under
    the contract the seller is obligated to provide to the customer at a later date pre-written major or
    minor software releases in tangible form?
    Yes. Since it is known that the customer will receive major and minor software releases in
    tangible form, the true object of the transaction is the sale of tangible personal property and is
    therefore subject to the tax.
13. If software is sold and delivered to the customer by electronic means via a modem and
    telephone line from a remote location and pre-written major or minor software releases will be
    provided under a maintenance contract sold in conjunction with the software, is the transaction
    subject to the sales and use tax if under the maintenance agreement the seller is obligated to
    provide to the customer at a later date pre-written major or minor software releases in tangible
    form?

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Yes. Since it is known that the customer will receive major and minor software releases in
tangible form, the true object of the transaction is the sale of tangible personal property and is
therefore subject to the tax.

14. If software is sold and delivered to the customer by electronic means via a modem and
    telephone line from a remote location and pre-written major or minor software releases will be
    provided under a maintenance contract that was not sold in conjunction with the software, is the
    transaction subject to the sales and use tax if under the maintenance agreement the seller is
    obligated and actually provides to the customer at a later date pre-written major or minor
    software releases in tangible form?
    The initial sale of the software is not subject to the tax since it was transferred by electronic
    means via a modem and telephone line from a remote location, provided no part of the software,
    including back-up diskettes and tapes, is delivered in a tangible form pursuant to the original
    contract.
    However, any pre-written major or minor software releases provided under a maintenance
    contract that was not sold in conjunction with the software may cause the charge for the
    maintenance contract to be subject to the tax. For additional information on determining if the
    charge for this maintenance contract is subject to the tax, see Question # 20.
    Software Provided through an Application Service Provider
15. Is a charge by Application Service Provider (ASP) that allows a customer to access the ASP
    website and use the software on that website subject to the sales and use tax?
    Yes. Charges by an Application Service Provider are similar to charges by database access
    services and are therefore subject to the sales and use tax under the provisions of Code Sections
    12-36-910(B)(3) and 12-36-1310(B)(3).

Software Sold as Part of the Sale of Computer Hardware

16. If a seller is selling both computer hardware and computer software, and the seller, before
    title or possession of the hardware is transferred to the customer, downloads the software from
    one of its computers to the computer that will be transferred to the customer, is a separately
    stated charge for software on the bill to the customer subject to the sales and use tax?
    Yes. The separately stated charge on the bill to the customer for software is a part of the “gross
    proceeds of sales” or “sales price” of the computer hardware when it is sold and delivered to the
    customer and is therefore subject to the tax. See Code Sections 12-36-90 and 12-36-130.
17. If a customer purchases a computer system (including separately priced and contracted for
    software) after testing the computer system on a short-term loaned basis, is the sale subject to the
    sales and use tax if the customer has the seller remove the software from the computer and the
    customer’s premises and then has the seller re-deliver the software by electronic means from a
    remote location?

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Yes. The separately stated charge on the bill to the customer for software is a part of the “gross
proceeds of sales” or “sales price” of the computer hardware when it is sold and delivered to the
customer and is therefore subject to the tax. See Code Sections 12-36-90 and 12-36-130.

18. If a customer purchases a computer system (including separately priced and contracted for
    software) after testing the computer system on a short-term loaned basis, is the sale subject to the
    sales and use tax if the customer has the seller re-deliver the software by electronic means from a
    remote location such that the previously loaned software would not be removed from the
    computer but that the electronically delivered software would “overlay” the original software?
    Yes. The separately stated charge on the bill to the customer for software is a part of the “gross
    proceeds of sales” or “sales price” of the computer hardware when it is sold and delivered to the
    customer and is therefore subject to the tax. See Code Sections 12-36-90 and 12-36-130.
    Maintenance Contracts
19. Are charges for maintenance agreements (whether optional or mandatory) that are made in
    conjunction with, or as part of the sale of, computer software sold and delivered by tangible
    means includable in "gross proceeds of sales" or "sales price", and, therefore, subject to the tax?
    Yes. Charges for maintenance agreements (whether optional or mandatory) that are made in
    conjunction with, or as part of the sale of, computer software sold and delivered by tangible
    means are includable in "gross proceeds of sales" or "sales price", and, therefore, subject to the
    tax.
20. Are charges for maintenance contracts that are not made in conjunction with or as part of the
    sale of, computer software sold and delivered by tangible means (e.g. contracts sold by a third
    party and contracts sold at a later date) includable in "gross proceeds of sales" or "sales price",
    and, therefore, subject to the tax?
    Maintenance contracts that are not sold in conjunction with the sale of computer software may or
    may not be subject to the sales or use tax. In determining whether or not a contract is taxable, the
    true object of the contract must be established. If the true object of a contract is to acquire
    tangible personal property (e.g. software updates provided by tangible means), the total charges
    for the contract are taxable, even though certain services are also provided. If the true object is to
    acquire services (e.g. telephone assistance), then the total charges are not taxable, even though
    certain tangible personal property is also provided. See the Discussion portion of this document
    for an example.
21. Are charges for maintenance agreements that are not made in conjunction with, or as part of
    the sale of, computer software sold and delivered by tangible means but are mandatory renewals
    of maintenance agreements that were made in conjunction with, or as part of the sale of,
    computer software sold and delivered by tangible means includable in "gross proceeds of sales"
    or "sales price", and, therefore, subject to the tax?

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Yes. Charges for mandatory renewals of maintenance agreements that were made in conjunction
with, or as part of the sale of, computer software sold and delivered by tangible means are
includable in "gross proceeds of sales" or "sales price", and, therefore, subject to the tax.

22. Are charges for maintenance agreements that are not made in conjunction with, or as part of
    the sale of, computer software sold and delivered by tangible means but are optional renewals of
    maintenance agreements includable in "gross proceeds of sales" or "sales price", and, therefore,
    subject to the tax?
    Charges for optional renewals of maintenance agreements may or may not be subject to the sales
    or use tax. In determining whether or not a renewal contract is taxable, the true object of the
    renewal contract must be established. If the true object of a renewal contract is to acquire
    tangible personal property (e.g. software updates provided by tangible means), the total charges
    for the renewal contract are taxable, even though certain services are also provided. If the true
    object is to acquire services (e.g. telephone assistance), then the total charges are not taxable,
    even though certain tangible personal property is also provided. See the Discussion portion of
    this document for an example.
    Systems
23. If a customer negotiates the purchase of a large computer system whereby the parties identify
    all the significant components of the system (hardware, operating software, application software,
    maintenance agreements, etc.) and establish a price for the entire system, can the buyer avoid
    sales and use tax on part of the purchase if various parts of the system are separately contracted
    for, priced, ordered and invoiced? For example, what is the application of the tax if the hardware
    and certain operating software are separately contracted for, priced, ordered and invoiced from
    any application software delivered electronically separate from the hardware?
    The purchase of the computer system was one negotiated transaction. As such, the total sales
    price is subject to the tax and separately contracting for, pricing, ordering and invoicing will not
    change the application of the tax.
    For example, if a customer negotiates the purchase of a large computer system whereby the
    parties identify all the significant components of the system and establish a price for the entire
    system, but the hardware and certain operating software are separately contracted for, priced,
    ordered and invoiced from any application software delivered electronically separate from the
    hardware, the total sales price is subject to the tax.
    SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Burnet R. Maybank III
Burnet R. Maybank III, Director
December 9
, 2003
Columbia, South Carolina

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