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Sales Tax On License Agreements

The sale of a software maintenance contract (updates and correction of errors on storage media, such as tapes. B) is also a sale of physical personal property and is therefore subject to sales or use tax. (Regulation 1502 (f) (1) (C). Royalties for services such as telephone support are taxable in connection with the sale of this maintenance contract, unless these services are optional and the customer can order these services at a price indicated separately. (Regulation 1502 (f) (1) (C). Services are only optional if the customer can purchase the maintenance contract without the purchase of the service. In this case, there is a sale in good standing to the retailer, followed by a sale in good standing by the retailer to its customer. During the first three-year period, if the licence is not renewed, the distributor has the option of confirming that the program has been destroyed or returning it to the distributor. After three years, the distributor appears to be running the program even if the licence is terminated. The distributor thus obtains possession of the program without obligation of restitution. This is a sale, not a lease. [Regulation (EEC) 1502 (f) (1) (A) and (B)) ] The dealer`s customer receives the software on the same basis.

Thus, the distributor sells directly to its customer. The sale to the retailer is a resale sale and is excluded from the turnover tax. The retailer`s sale to its customers is taxable retail. The tax on this sale is the sale price of $32,000. In addition, the $7,000 is subject to VAT because “maintenance contracts” for updating and subsequent versions of the software are considered sales of physical personal property. (Regulation 1502 (f) (1) (C) and note 120.0550.) 6/22/95. Look carefully at the contract to ensure that it is in charge of who controls the devices, who has access and who manages them, as they help determine whether the agreement is subject to sales or use tax. The term of the licence is identified as a lease for an initial period of 12 months. The licensee (and the underlicensed) has the right to extend the term of the licence for an additional 12 months, unless the licensee or distributor informs the other party of the intention to terminate or renegotiate the contract at least 60 days before the anniversary.

If the license is terminated for any reason during this 3-year period, the licensee must uninstall the program from the computer on which it is installed and confirm to the owner that the program has been destroyed, or return the program to the distributor.