Was software downloaded electronically at the customer's location subject to South Carolina sales and use tax?

Plain-English summary

South Carolina Revenue Ruling 12-1 treated software as nontaxable when it was sold and delivered entirely by electronic means, even when the seller physically carried a laptop to the customer's location to make the transfer.

The seller connected its laptop to the buyer's computer through the internet, a wireless network, or another electronic connection, downloaded the software, disconnected, and left with the laptop. Because no tape, diskette, flash drive, backup copy, or other tangible medium was delivered, the transaction was not subject to sales or use tax under the ruling.

The ruling also treated a programmer's direct changes to a customer's existing source code as a nontaxable service when the programmer did not transfer new software. It distinguished both situations from taxable software delivered on tangible media and from taxable application-service-provider access to software hosted on the provider's website.

Electronic delivery at the customer's site

The Department said the seller's physical presence with a laptop did not convert an electronic transfer into tangible delivery. What mattered was how the customer received the software.

The result required a completely electronic transfer. Delivering any part of the software by tangible means—including a backup tape, disk, or flash drive—fell outside the ruling's nontaxable conclusion.

The Department applied the true-object test and found that the customer bought intangible software, not access to the internet or wireless network used to transmit it. The connection was only the delivery method.

Direct source-code work

The second transaction involved a programmer who connected a laptop to the customer's computer but did not download software. Instead, the programmer changed the customer's existing source code directly.

The Department treated that work as a service because no software was sold or delivered by either tangible or electronic means. The ruling's conclusion depended on those exact facts; a contract that also transfers new code, copies, licenses, or media may require a different analysis.

Important distinctions

Tangible software media

Software delivered on tape, diskette, flash drive, or another tangible medium was taxable under the authorities discussed in the ruling.

Hosted software and ASP access

The ruling said charges by an application service provider that let a customer access the provider's website and use software hosted there were taxable under South Carolina's communications provisions. That is different from delivering a software copy electronically to the customer's own computer.

Mixed delivery

The nontaxable electronic-delivery result required that no part of the software be delivered tangibly. Sellers should document the actual delivery process and every item provided to the customer.

Common questions

Q: Did bringing the seller's laptop onsite make the software taxable?

A: No. The ruling treated the transfer as electronic because the seller connected the computers, downloaded the software, and took the laptop away.

Q: Could the seller also provide a backup flash drive?

A: Not within this ruling's nontaxable conclusion. It expressly required that no tangible copy or backup be delivered.

Q: Was editing the customer's source code taxable?

A: No, on the stated facts, because the programmer provided a service and transferred no software.

Q: Did the ruling exempt hosted software access?

A: No. It expressly distinguished taxable ASP website access from an electronic software download.

Citations and references

• S.C. Code Ann. §§ 12-36-910(A) and 12-36-1310(A) — sales and use tax on retail tangible-personal-property transactions
• S.C. Code Ann. § 12-36-60 — tangible personal property and specified taxable services or intangibles
• S.C. Code Ann. §§ 12-36-910(B)(3) and 12-36-1310(B)(3) — communications charges used for the ASP distinction
• Citizens and Southern Systems, Inc. v. South Carolina Tax Commission, 311 S.E.2d 717 (S.C. 1984) — software on magnetic tape, discussed by the ruling
• SC Revenue Rulings #11-2, #03-5, and #96-3 — prior software guidance modified by RR #12-1
• SC Revenue Ruling #06-8 and S.C. Regulation 117-329 — ASP and communications guidance cited by the ruling

Subject

Electronically Delivered Software

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/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 #12-1

SUBJECT:

Electronically Delivered Software
(Sales & Use Tax)

EFFECTIVE DATE:

Applies to all periods open under the statute.

MODIFIES:

SC Revenue Ruling #11-2
SC Revenue Ruling #03-5
SC Revenue Ruling #96-3

REFERENCES:

S. C. Code Ann. Section 12-36-910 (2000, Supp. 2008)
S. C. Code Ann. Section 12-36-1310 (2000, Supp. 2008)
S. C. Code Ann. Section 12-36-60 (2000)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (Supp. 2008)
SC Revenue Procedure #09-3

SCOPE:

The purpose of a Revenue Ruling is to provide guidance to the public
and to Department personnel. It is an advisory opinion issued to apply
principles of tax law to a set of facts or general category of taxpayers. It
is the Department’s position until superseded or modified by a change in
statute, regulation, court decision, or another Departmental advisory
opinion.

Questions:

1. If software is sold and delivered electronically whereby the seller personally brings the
   software to the buyer’s location on a laptop computer, establishes a connection between the
   laptop and the buyer’s computer via the Internet, a wireless network, or any other wireless
   connection in order to download the software into the buyer’s computer, and then terminates the
   connection between the computers and takes the laptop with him when he leaves, is the sales
   transaction subject to the sales and use tax?
2. If a software programmer personally brings a laptop computer to a customer’s location,
   establishes a connection between the laptop and the customer’s computer (wired or wireless),
   and does not download software but makes changes directly to the source code of the customer’s
   software, is this transaction subject to the sales and use tax?

1

Conclusions:

1. Software sold and delivered by electronic means via the Internet, a wireless network, or any
   other wireless connection at the buyer’s location, as described in Question #1 above, is not
   subject to the sales and use tax, provided no part of the software, including back-up tapes,
   diskettes, or flash drives, is delivered by tangible means. 1
   Note: Charges by an Application Service Provider (ASP) that allows a customer to access the
   ASP website and use the software on that website are subject to the sales and use tax under Code
   Sections 12-36-910(B)(3) and 12-36-1310(B)(3). See SC Revenue Rulings #06-8 and #03-5 and
   SC Regulation 117-329.
2. No. If a software programmer personally brings a laptop computer to a customer’s location,
   establishes a connection between the laptop and the customer’s computer (wired or wireless),
   and does not download software but makes changes directly to the source code of the customer’s
   software, this transaction is not subject to the sales and use tax. The software programmer has
   not sold and delivered software by tangible or electronic means. The software programmer has
   provided a service by making changes directly to the source code of the customer’s software in
   the manner described in Question #2 above.
   Background:
   Over the years, the Department has issued several advisory opinions concerning the taxation of
   software. In 1996, the Department issued an advisory opinion, SC Revenue Ruling #96-3, stating
   that software delivered electronically via a modem and the telephone lines was not subject to the
   sales and use tax since it does not constitute the sale of “tangible personal property” as defined in
   the sales and use tax law.
   In subsequent advisory opinions, the Department continued to state that the sale of software
   delivered electronically from a remote location via a modem and telephone was not subject to the
   sales and use. See SC Revenue Rulings #11-2 and #03-5.
   Recently, questions have arisen as to the taxability of software delivered electronically; not from
   a remote location, but via the Internet, a wireless network, or any other wireless connection from
   the seller’s laptop at the customer’s location. In these circumstances, the seller personally brings
   the software to the buyer’s location on a laptop computer, establishes a connection between the
   laptop and the buyer’s computer via the Internet, a wireless network, or any other wireless
   connection in order to download the software into the buyer’s computer, and then terminates the
   connection between the computers and takes the laptop with him when he leaves.
   In addition, a software programmer may also not download software from a laptop into the
   customer’s computer, but gain access to the customer’s computer to make changes directly to the
   source code of the customer’s software.

1

For information on software delivered by tangible means, see SC Revenue Rulings #11-2 and #03-5.

2

Law and Discussion:
Code Section 12-36-910(A) states:
A sales tax, equal to [six] 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 [six] 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.)
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 sales and use taxes are imposed with respect to retail sales of tangible personal
property. In addition, 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.
Furthermore, 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 software
sold and delivered to the purchaser by means of magnetic tape was tangible personal property
and subject to the sales and use taxes.
In summary, software sold and delivered to a purchaser by tangible means, such as by tape,
diskette or flash drive, is a sale subject to the sales or use tax. Software sold and delivered to a
purchaser electronically is not subject to the sales and use tax.
Finally, 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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In addressing whether the software is a “communication,” it must be determined whether the
purchaser of 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 transaction
described in Question #1 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, it the position of the Department that, except for charges by an Application Service
Provider (ASP) that allows a customer to access the ASP website and use the software on that
website 2, software sold and delivered by electronic means does not meet the definition of
tangible personal property set forth in Code Section 12-36-60 or fall within the provisions taxing
communications services under Code Section 12-36-910 or Code Section 12-36-1310 and is
therefore not subject to the sales and use tax.
Therefore, if software is sold and delivered electronically whereby the seller personally brings
the software to the buyer’s location on a laptop computer, establishes a connection between the
laptop and the buyer’s computer via the Internet, a wireless network, or any other wireless
connection in order to download the software into the buyer’s computer, and then terminates the
connection between the computers and takes the laptop with him when he leaves, the software
has been sold and delivered by electronic means (via the Internet, a wireless network, or any
other wireless connection at the buyer’s location) and is not subject to the sales and use tax,
provided no part of the software, including back-up tapes, diskettes, or flash drives, is delivered
by tangible means.
In addition, if a software programmer personally brings a laptop computer to a customer’s
location, establishes a connection between the laptop and the customer’s computer (wired or
wireless), and does not download software but makes changes directly to the source code of the
customer’s software, this transaction is not subject to the sales and use tax since the software
programmer has not sold and delivered software by tangible or electronic means. The software
programmer has provided a service by making changes directly to the source code of the
customer’s software.
For information on software delivered by tangible means, see SC Revenue Rulings #11-2 and

03-5.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/James F. Etter
James F. Etter, Director
March 20
, 2012
Columbia, South Carolina
2

Charges by an Application Service Provider (ASP) that allows a customer to access the ASP website and use the
software on that website are subject to the sales and use tax under Code Sections 12-36-910(B)(3) and 12-361310(B)(3). For more information on the taxation of communications services (including Application Service
Providers) under the sales and use tax law, see SC Revenue Ruling #06-8 and SC Regulation 117-329.

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