Does an out-of-state software company that licenses stock-trading software to Utah broker dealers and their customers have Utah sales tax nexus, and which of its license, tech-support, and installation fees are taxable?

Plain-English summary

A Texas limited partnership ("LP") with no Utah offices or employees develops "Trading Software" (used by stock brokers' customers to place trades) and "Analytic Software" (charts/graphs/analytics), licensed to broker dealers nationwide and, in turn, sub-licensed to those broker dealers' individual customers ("End Users") -- some of whom are in Utah. LP asked 15 detailed questions about nexus, taxability of license fees, technical support, installation, registration, and voluntary disclosure.

Nexus. The Commission first classified LP's software as "canned computer software" -- not custom-built for one purchaser -- which counts as taxable tangible personal property under Utah Admin. Rule R865-19S-92(A)(1), (5). Because LP owns and licenses (leases) that software to Utah customers and services it there, Utah Code Ann. § 59-12-107(1)(a)(v) creates statutory nexus. On the separate constitutional question, the Commission distinguished Quill Corp. v. North Dakota, 504 U.S. 298 (1992), where the U.S. Supreme Court found a company's minimal software licensing to a handful of customers didn't meet the Commerce Clause's "substantial nexus" test. Here, LP's software licensing was a regular, systematic business practice intentionally establishing and maintaining a Utah market -- not a de minimis presence -- so the Commission held LP's Utah presence is substantial enough to create nexus, even without any Utah employees.

License fees (Trading and Analytic Software). LP owes Utah sales tax whenever a Utah broker dealer or a Utah End User is a party to the license or sub-license transaction -- a sub-license to an End User is treated as its own separate transaction, not a resale of the broker dealer's license. So LP is liable when: a Utah broker dealer holds the Site License; a Utah End User sub-licenses software tied to a Utah broker dealer's site; or (notably) a Utah End User sub-licenses software even through an out-of-state broker dealer. The one scenario where LP is not liable: a Utah broker dealer's Site License used by an End User located outside Utah over the Internet -- tax liability tracks where the actual license/sub-license holder is, not just where the broker dealer's office sits.

Technical support fees. Under § 59-12-103(1)(g), services to repair or renovate tangible personal property are taxable -- so fees covering actual software fixes or updates are taxable. But merely answering questions about how to use the software by phone or Internet, without adjusting or servicing it, is a nontaxable service. The dividing line is billing: separately state the nontaxable support fees, or combining them with taxable repair/update fees makes the entire charge taxable.

Installation fees. Section 59-12-103(1)(g) also taxes services that install tangible personal property in connection with other tangible personal property. Since neither the statute nor Rule 92 defines "install," the Commission applied a dictionary definition -- "to set in position or adjust for use" -- and held that transferring software onto computer hardware fits that definition. As a result, installation fees for canned software are always taxable, even if separately stated -- unlike technical support, itemizing doesn't create an exemption here. This applies whether LP's own employee installs the software or an unrelated third-party installer does it (the installer collects the tax either way). This is distinct from Rule 92(D)'s separate, nontaxable category for services that modify or adapt software to a purchaser's specific needs/equipment, which can be exempt if separately stated -- installation itself just isn't that category.

Physical presence questions. LP asked whether nexus would change if its Texas-based employees occasionally or frequently traveled to Utah for support, installation, or sales solicitation. The Commission said it doesn't matter -- nexus already exists from LP's ownership of software in Utah and its regular, systematic Utah business, regardless of whether these additional in-person activities occur.

Registration, use tax, and voluntary disclosure. Since nexus exists, LP must register with the Commission (Form TC-69) and file regular sales tax returns reporting any use tax liability alongside sales tax. Utah's Voluntary Disclosure Program lets companies anonymously approach Commission staff to resolve past tax liabilities and potentially receive penalty/interest relief -- but that program is not available to a company the Commission has already contacted first. Finally, unprompted, the Commission flagged that Utah also imposes property tax on tangible personal property located in Utah, which includes canned computer software -- a separate obligation LP hadn't asked about.

What this means for you

Out-of-state software companies licensing to Utah customers

Owning and licensing software used in Utah -- even with zero Utah employees -- can create substantial nexus if your licensing is a regular, ongoing business practice rather than an isolated transaction. Don't assume a lack of physical presence protects you; this ruling predates Wayfair and shows physical-presence nexus could already reach pure software licensors.

SaaS and software companies structuring license fees, support, and installation

Separately stating fees protects you on technical support (pure Q&A support can be nontaxable) but not on installation (which is taxable regardless of itemization). Know which bucket each service falls into before assuming itemizing solves your tax exposure.

Multistate businesses considering the Voluntary Disclosure Program

If you suspect you have unreported nexus and back tax exposure, approach Utah's Voluntary Disclosure Program before the Commission contacts you -- the program's penalty/interest relief isn't available once the state has already reached out first.

Accountants and tax professionals

This ruling predates the 2018 Wayfair decision and Utah's later economic-nexus statute, so its physical-presence Commerce Clause analysis (grounded in Quill) reflects pre-Wayfair law. Still useful for understanding how "regular and systematic" licensing activity, even without employees, satisfied nexus even under the older, stricter framework.

Common questions

Q: Does licensing software to Utah customers create nexus even with no Utah employees or offices?
A: Yes, according to this ruling -- if the licensing is a regular, systematic business practice establishing a Utah market, not just a handful of isolated transactions.

Q: Is a sub-license to an individual end user treated as a resale of the broker dealer's license?
A: No. It's treated as its own separate, independently taxable transaction.

Q: Can I avoid sales tax on software installation fees by billing them separately from the license fee?
A: No. Installation of canned software onto hardware is taxable even when separately stated -- unlike some other services where separate statement matters.

Q: Is answering a customer's how-to questions about software taxable?
A: Not if it's pure troubleshooting/usage support without adjusting or repairing the software, and it's billed separately from any taxable repair/update charges.

Q: Does this ruling apply to my software licensing business?
A: No. It binds the Commission only for the requesting company and the facts described. Another taxpayer can't rely on it as binding, though it may carry some persuasive weight in a dispute with closely similar facts.

Citations and references

Statutes, rules, and cases:

• Utah Admin. Rule R865-19S-92(A)(1), (5) (canned software as tangible personal property)
• § 59-12-107(1)(a)(v) (nexus from leasing/servicing Utah property)
• § 59-12-103(1)(g) (taxable repair, renovation, and installation services)
• Quill Corp. v. North Dakota, 504 U.S. 298 (1992) (Commerce Clause substantial nexus test)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/99-041.htm

Original ruling text

99-041

Response October 5,
2000

REQUEST LETTER

99‑041

October 4,1999

VIA CERTIFIED MAIL

Re: Request
for opinion regarding taxability under Title 59, Chapter 12, of the Utah Code
Annotated, relating to sales and use tax.

Dear NAME;

As previously discussed with NAME of your
Nexus Division, we respectfully request an opinion regarding the sales and use
tax relative to the following factual scenarios:

I. Facts

Overview

Our client, a STATE Limited Partnership (ALP@), is a software developer. LP develops software for the sole purpose
of licensing the software to other
entities (i) in Utah, (ii) outside the state of Utah and within the
United States, and (iii) outside of the United States. The software is designed
to facilitate individual stock trading on various national stock exchanges
("Trading Software").
Typically the Trading Software is licensed to a broker dealer which then
allows broker dealer's customer ("End User") to use the Trading
Software in one of two manners. The End
User may use the Trading Software on a computer terminal located in the broker
dealer's office. Alternatively, the End User may download the software from the
broker dealer's website or under certain circumstances from LP's website for
use in End User's home or office.

LP's offices are in Texas. LP does not have any offices outside of
Texas. In addition, LP has no employees
other than those located in aid working in Texas, except in the limited circumstances discussed below.

License Agreements

The license fee relative to the Trading
Software is payable by the broker dealer directly to LP. The license fee is a fixed fee multiplied by
the number of times the End User uses the Trading Software to place an order
relative to a stock trade. No fee is charged for a canceled order.

The Trading Software is licensed pursuant to
a software site license entered into between LP and the broker dealer
("Site License"). The Site License typically has a term of one year
subject to termination by either party on sixty (60) days notice. The Site License provides that the LP retains
ownership of the code for the duration of the Site License and thereafter. Use
of the software pursuant to a Site License by an End User must be in the broker
dealer's office (i.e., the site) and may not be by or through the Internet.

Under certain circumstances, a broker dealer
may enter into an amendment to the standard Site License with LP to permit the
End User to use the Trading Software through the Internet. If the broker dealer enters into an
Internet Amendment with LP then each
End User must enter into a Sub-license Agreement
("Sub-license") with respect to the End User's use of the Trading
Software. The Sub-license is executed via point and click method on the
Internet.

The software also possesses the capability to
supply charts, graphs and analytics ("Analytic Software") to the
individual End User. The license fee
relative to the Analytic Software is a fixed monthly charge (i) for each work
station provided in the broker dealer's office, payable by the broker dealer
directly to LP, and (ii) for each End User of the Analytic Software provided to
the End User via the Internet, payable by the End User directly to LP.

The Site License Agreement and Internet
Amendment (including Sub-license Agreement as Exhibit A to the Internet
Amendment) Forms are attached as Exhibits 1 and 2 respectively. It is intended
that all of the agreements be enforceable pursuant to the provisions of
applicable STATE Law. Any dispute must be determined solely in the State
District Court of a specific County in Texas (see Section 9.02 of exhibit 1).

Sales, Installation and Technical Support

Software programs developed by LP are
advertised in trade publications or will in the future be advertised in trade
publications with national circulation, through direct mail and other
multi-media campaigns. LP's contact with customers occurs almost exclusively by
telephone, mail and Internet from its offices in STATE. Except in limited
circumstances, all software is shipped to the customer's location via common
carrier, Internet or personally delivered by an unrelated third party installer
who is paid by the customer and is not an agent of LP.

LP provides technical support services from
its STATE office to all broker dealer customers relative to the Trading
Software and the Analytic Software. This service is not included in the license
agreement as a warranty provision. The technical support services are billed
monthly on an hourly basis directly to broker dealer. The LP employee will not
be acting in a sales capacity (making sales presentations or taking new
orders).

Current Tax Treatment

LP is currently charging, collecting and
paying over to the State of STATE sales taxes on all of its software licensing,
installation services and technical support fees derived from broker dealers or
the End Users.

II. Questions:

Nexus for Sales or Use Tax Derived from the
License

• *

Trading Software

1. If
   the LP has no employees in Utah, is sales or use tax due on license fees
   relative to the

Trading Software pursuant to the Site License
if the licensee (broker dealer) is located in Utah?

2. If
   the LP has no employees in Utah, is sales or use tax due on license fees with
   respect to Trading Software downloaded from a broker dealer's website for use
   by the End User pursuant to a Sub-license in the End User's home or office, if
   the Site License relates to the broker dealer's office in Utah?

3. If
   the LP has no employees in Utah, is sales or use tax due on license fees
   charged to the broker dealer with respect to Trading Software downloaded from
   LP's website for use by the End User's pursuant to a Sub-license in End User's
   home or office, if the Site License relates to the broker dealer's office in
   Utah?

4. If
   a broker dealer's office is in Utah, and the LP has no employees in Utah, does
   the fact that broker dealer=s customer (i.e., End User) may be located in a state other than broker
   dealer's office (i.e., broker dealer is providing Trading Software to End
   User's by the Internet pursuant to an Internet Amendment and Sub-license) make
   a difference?

Analytic Software

5. If
   the broker dealer is located in Utah, and the LP has no employees in Utah, is
   sales or use tax due on the monthly fixed dollar license fee paid directly by
   the End User to LP for use of

the Analytic Software, if the End User is
located outside of Utah?

6. If
   the End User's located in Utah, and the LP has no employees in Utah, is sales
   or use tax due on the monthly fixed dollar license fee paid directly by the
   broker dealer to LP on behalf of the End User for use of the Analytic Software,
   if the broker dealer is located outside of Utah?

Nexus for Sales and Use Tax Derived from
Technical Support

7. Will
   sales or use tax be due on separately stated technical support fees charged pursuant to the Site
   License if the licensee (broker dealer) is located in Utah, but the work is
   performed via telephone or Internet by an LP employee based in STATE?

Nexus for Sales and Use Tax Derived from
Installation

8. Will
   sales or use tax be due on separately stated fees relative to the installation
   of the Trading Software on a licensee's (broker dealer's) computer hardware
   under a Site License if the

licensee (broker dealer) is located in Utah
and the work is performed via telephone Or the

Internet by an LP employee based in STATE?

9. Will
   sales or use tax be due on installation performed in Utah under a Site License
   by an unrelated third party, approved by LP but hired and paid by the licensee?

Nexus for sales and Use Tax Derived from
Physical Presence in Utah

10. In
    regards to Questions 1 through 9 above, will any answer change (i.e., sales or
    use tax

found to be due) if an LP employee based in STATE,
with no authority to propose or negotiate

sales:

a. Occasionally
travels to Utah to provide technical support services for a licence (broker
dealer) located in Utah pursuant to the Site License?

b. Frequently
travels to Utah to provide technical support services for a licensee (broker
dealer) located in Utah pursuant to the Site License?

11. In
    regards to Questions 1 through 9 above, will any answer change (i.e., sales and
    use tax found to be due) if an LP employee based in STATE with no authority to
    propose or negotiate

sales:

a. Occasionally
travels to Utah to install Trading Software on a licensee's (broker dealer)
computer hardware under a Site License?

b. Frequently
travels to Utah to install Trading Software on a licensee's (broker dealer)

computer hardware under a Site License?

12. In
    regards to Questions 1 through 9 above, will any answer change (i.e., sales or
    use tax

found to be due) if an LP employee:

a. Occasionally
travels to Utah to solicit customers (sales calls, proposals, etc.) or take

sales orders?

b. Frequently
travels to Utah to solicit customers (sales calls, proposals, etc.) or take
sales orders?

Administration where Sales and Use Tax
Liability Exists

• *

13. If
    sales tax liability exists, what are the registration and filing requirements?

14. If
    sales tax liability does not exist, does LP have any responsibility to collect
    the use tax on its transactions in Utah?

a. If
so, what are the registration and filing requirements?

b. If
no responsibility for collecting use tax exists, can the LP choose to collect
the use tax on behalf of the broker dealer or End User?

15. If
    LP is determined to owe sales or use tax due to its operations in Utah, can LP
    voluntarily disclose its failure to register, pay any taxes due and receive a
    waiver for late lees, penalties, and/or interest under an amnesty program?

We respectfully request your response to the
above questions. If you have any questions

regarding the factual scenarios or to the
questions stated above, please do not hesitate to give us a

call. Thank you in advance for you
assistance.

Very truly yours,

NAME

RESPONSE
LETTER

October 5, 2000

RE: Nexus
Issues Relating to Texas Limited Partnership=s Licensing Computer Software

Dear NAME,

You have requested an advisory opinion
regarding the Utah sales and use tax liability of a Texas Limited Partnership (ALP@) that develops and licenses computer software to entities in
Utah. Before answering your specific
questions, let us first address Utah=s laws and policies concerning computer software and sales and use tax
nexus.

Computer Software. LP
will be licensing two computer software programs, referred to as the Trading
Software and the Analytic Software, to multiple licensees, which will be
installed on the Licensee=s hardware either Afrom network or disk provided@ by LP (Article 2.02(b) of the provided Exhibit 1 contract). These computer software programs have not
been prepared at the special request of a purchaser to meet its particular
needs, but are licensed to multiple licensees.
Accordingly, they are deemed Acanned computer software@ for Utah taxation purposes.
Utah Admin. Rule R865-19S-92(A)(1) (ARule 92"). Section (A)(5)
of Rule 92 further provides that Atangible personal property@ includes canned computer software.

Sales and Use Tax Nexus.
Utah Code Ann. '59-12-107(1)(a)(v)
provides that a vendor has nexus with Utah for sales and use tax purposes if it
regularly engages in any activity in connection with the leasing or servicing
of property located in Utah. Your
exhibits and letter indicate that LP will be licensing canned computer software
to its Utah customers, retaining ownership rights to that canned computer
software, and providing service on the software. Accordingly, Utah law would impose sales and use tax nexus upon
LP because of its ownership and leasing of tangible personal property in
Utah.

Nevertheless, we must also examine whether LP=s activities create sales and use tax nexus
with Utah under the Commerce Clause. As
stated above, LP will own tangible personal property in Utah, i.e., the canned
computer software that is licensed to its Utah customers, with ownership or
title remaining in LP. LP will also be
servicing the software located in Utah or providing technical support services
to its customers in Utah, most likely by telephone or the Internet. In Quill Corp. v. North Dakota, 504
U.S. 298 (1992), the United States Supreme Court commented that Quill licensed
its computer software program to a few of its North Dakota mail-order
customers, enabling those customers to check current inventories and prices and
place orders directly. Quill retained
title to this software. However, the
Court noted that while the presence of this software in North Dakota
constituted some minimal physical presence, Quill=s software licensing activity and the presence of the software did not
meet the Asubstantial nexus@ test required to satisfy the Commerce
Clause.

However, had Quill=s small amount of software licensing been
more extensive, the Court may have reached a different conclusion. LP=s main activity in Utah will be the licensing of computer software, a
regular and systematic business practice intended to establish and maintain a
market in Utah for this computer software and its electronic services of
facilitating individual stock trading.
Accordingly, LP=s main
economic activity in Utah results in and necessitates its physical presence in
Utah, a presence that is purposeful and necessary. In addition, there is no indication that LP=s physical presence in Utah will be de
minimis; i.e., where LP would only license a very limited number of computer
software programs in Utah. For these
reasons, LP=s physical presence in Utah will constitute a
substantial presence in the State, and LP will have nexus with Utah for sales
and use tax purposes because of these activities.

Questions Posed In Request Letter. LP
will be licensing its computer software directly to broker dealers or
indirectly through sub-licenses to customers of these broker dealers (AEnd Users@). Any sub-license to an End
User is assumed to be a separate transaction, not a Aresale@ of the license purchased by the broker dealer. As a result, LP is liable for Utah sales tax
on all license or sub-license fees relative to its Trading Software or Analytic
Software when that software is licensed to a Utah broker dealer or sub-licensed
to a Utah End User. However, LP is not
liable for Utah sales tax on licenses with non-Utah broker dealers or
sub-licenses with non-Utah End Users.
Accordingly, LP is liable for Utah sales tax under the circumstances
listed in Questions #1, #2, #3, #5, and #6 of your letter, but it is not liable
for Utah sales tax under the circumstances listed in Question #4. We may also point out that a sub-license to
a Utah End User through a non-Utah broker dealer would also result in Utah
sales tax liability for LP on the sub-license fees.

In Question #7, you ask if sales and use tax
is due on fees charged to Utah customers for technical support, when those fees
are separately stated. Utah Code Ann. '59-12-103(1)(g) provides that services to
repair or renovate tangible personal property are subject to sales tax. Accordingly, any fees charged by LP to
repair the canned computer software or renovate it, including fees associated
with providing updated software, are taxable fees. On the other hand, answering technical questions on the use of
the software via telephone or Internet would constitute nontaxable services as
long as LP does not adjust or service the software in connection with the call
or Internet. If LP separately states
its fees for nontaxable services, it has no tax liability regarding these
fees. However, if nontaxable and
taxable fees are combined for billing purposes, the entire amount is taxable.

In Questions #8 and #9, you ask whether
installation fees associated with LP=s computer software are taxable.
Section 59-12-103(1)(g) provides that services to install tangible
personal property in connection with other tangible personal property are
taxable. The computer software licensed
by LP is tangible personal property.
When fees are charged to install that software to computer hardware,
which is also tangible personal property, those fees are taxable if the service
is to Ainstall@ that software.

AInstall,@ for purposes of Section 103(1)(g), is not specifically defined by the
Legislature. However, Webster=s II Dictionary (1988) defines Ainstall@ as Ato set in position or adjust for use.@ When
computer software is Ainstalled@ onto computer hardware, an act occurs where
the software is transferred from one state or one location onto the computer
hardware in another state or other location.
This act sets the software in position on the computer hardware or
adjusts the software for use on the computer hardware. Accordingly, the service
of installing canned computer software in computer hardware is a taxable
service, even if it is stated separately.[1]

Thus, LP would need to charge and collect
sales tax on its installation fees.
Should an unrelated third party contract with LP=s customer to install the software, the third
party installer would need to charge and collect sales tax on its installation
fees. We point out that the
installation service is differentiated from those services deemed nontaxable in
Section (D) of Rule 92. Section (D)
clarifies that services to modify or adapt canned computer software to a
purchaser=s needs or equipment are not taxable if the
charges are separately stated and identified.

Questions #10, 11, and 12 ask whether LP
would be subject to sales and use tax nexus with Utah under a number of
situations in which LP=s
employees would travel to and perform activities in Utah. We determined above that LP has sales and
use tax nexus with Utah because of: 1) ownership of tangible personal property
in Utah; and 2) the conducting of a
regular and systematic business in Utah to establish and maintain a market for
that computer software. Accordingly,
sales and use tax nexus with Utah exists whether or not LP engages in these
additional activities in Utah.

Question #13. As an entity with sales and use tax nexus with Utah, LP will need
to register with the Tax Commission and obtain a tax account. Form TC-69 is enclosed for LP to complete
and return to the Commission to obtain this account.

Question #14 assumes that LP does not have
sales tax nexus with Utah. As we have
determined that it does, LP will be filing regular sales tax reports with Utah,
on which any use tax liability should also be reported.

As to Question #15, the Tax Commission has a
Voluntary Disclosure Program, through which companies may anonymously approach
the program staff to seek resolution of Utah tax liabilities arising from past
activities. However, the program is not
available to vendors who have been contacted first by the Tax Commission. Should you wish to inquire further about the
program, please contact NAME at #####.

Though you have not inquired specifically
about Utah property tax obligations, we take this opportunity to inform you
that Utah imposes property taxes upon tangible personal property located in
Utah, which includes canned computer software. If you have any other questions, please contact us.

For the Commission,

Marc B. Johnson

Commissioner

[1] In