The Missouri Administrative Hearing Commission (AHC) recently held that the sale of canned computer software to a customer through a “load and leave” delivery method was not subject to Missouri use tax because the software was not tangible personal property. This decision overrides a Missouri DOR policy that software transferred by the load and leave method is taxable. (FileNet Corp. v. Director of Revenue, Administrative Hearing Commission (Missouri), No. 07-0146 RS, August 20, 2010.) For a full copy of the lengthy decision, please contact us at www.PeisnerJohnson.com.
What is “Load and Leave”?
The load and leave method refers to a situation in which the vendor of the software typically brings the software to the customer location on some medium that is the property of the software vendor. Let’s say it’s on a usb flash drive. The vendor owns the the flash drive and never transfers that flash drive to the customer. The vendor transfers the software from the flash drive to the customer’s computer installing the software for the customer. The vendor removes the flash drive and leaves the customer location. No tangible media is ever transferred to the customer. This is a basic description of a typical load and leave transaction.
Missouri’s Old Policy
Until this Decision was reached, Missouri’s policy had been that computer software load and leave transactions were subject to sales and use tax. (See Tax Policy Notice TPN16, Missouri Department of Revenue, January 9, 2004; Letter Ruling LR1724.) Now, this policy is no longer valid.
The basis of the ruling in this case has potentially far-reaching effects. The AHC considered prior Missouri court precedents as well as conclusions reached in other states in recent cases but ultimately said it had to rely on the strict wording of the Missouri statutes in reaching their decision. In construing the statute, they made the point that taxation statutes must be construed in favor of the taxpayer. This is in noted contrast to the usual point made in many cases where taxpayers are contending they qualify for an exemption. In those cases, the administrative officers or judges, almost always will point out that since exemptions are the “antithesis of fair and equal taxation” they must be strictly construed against the taxpayer. In this case, the taxpayer’s main contention was that the tax did not apply to this transaction not because of an exemption, but because the statute did not explicitly tax it. Therefore, the statute must be construed in favor of the taxpayer. Fortunately for this taxpayer, the AHC agreed with them.
The taxpayer also made other alternative arguments, but the AHC did not address them with conclusions of law but they did make findings of fact relative to the arguments,
Important Findings of Fact
Something tangible is capable of being perceived, especially by the sense of touch. It is a fact that software takes up space on a computer’s hard drive. However, the evidence in the record showed that a person cannot see or touch software. A person can only see the media on which the software is stored, such as a computer, a CD or a hard drive. If one had an oscilloscope, one could see the positive and negative charges moving across a chip, but the 1s and 0s could not actually be seen. Under the load and leave method, the taxpayer's programs were transferred from the taxpayer's portable USB hard drive onto the customer's computer system. There was no use of any physical medium, such as tapes or disks, to transmit the computer programs to the end-user, and there was no sale of tangible personal property. Also, the taxpayer did not leave the portable USB hard drive or any other tangible storage media or other tangible personal property with the customer.
Software is Not Tangible Property in Missouri
Based on the record in this case, the AHC held that the taxpayer's software was intangible. The statute taxes only the sale of tangible personal property. Since software is intangible, no tax is due in Missouri. Missouri’s old policy (before they changed in in January 2004) was that software delivered electronically where no tangible personal property was included (including when delivered by load and leave) was not taxable. They changed their policy effective back in January 2004. After that date, all load and leave transactions were taxable. Electronic delivery with no tangible medium being transferred were not taxable. It was always odd that MO would make the distinction that while electronic downloads are not taxable, if the vendor downloads the software to their customer’s computer in person leaving behind no TPP, that it would now be taxable. But, thanks to this decision, there is no longer such a distinction.
But this decision seems to throw the whole question out in the open. Is software even taxable at all regardless of how it is delivered? Is the means of delivery completely superfluous and is it all about the true object of the transaction? That certainly seems to be the overriding message to this reader. Consider this: the AHC stated that while it was true that precedents from the Missouri Supreme Court have applied to sales of software, the prior cases did not squarely address the issue of whether software is tangible personal property. In fact, tellingly, the AHC compared the sale of software on a disk to the sale of a share of stock. The sale of stock is not taxed because it is intangible in nature. Yes, it is represented on some fancy parchment stock paper, but the value of the paper is inconsequential to the value of the ownership interest it represents. It could certainly be argued using the reasoning in this case that in Missouri all software is intangible by nature and whether it is transferred electronically, by load and leave, or by tangible medium does not matter.
This issue bears very close watching.
Where Else is Load and Leave Not Taxable?
We thought our readers might be interested to see how some other states tax software delivered by the load and leave method. Here is some good research from CCH on the issue.
Prior to January 1, 2010, computer software delivered electronically or delivered by load and leave was exempt.
But wait ... there’s more: according to the North Carolina Department of Revenue, effective January 1, 2010, the sale at retail and the use, storage, or consumption of computer software that meets any of the following descriptions is exempt: (1) software designed to run on an enterprise server operating system; (2) software sold to a person who operates a data center and is used within the data center; and (3) software sold to a person who provides cable service, telecommunications service, or video programming and is used to provide ancillary service, cable service, Internet access service, telecommunications service, or video programming. In addition, and also effective January 1, 2010, computer software or digital property that becomes a component part of other computer software or digital property that is offered for sale or a service that is offered for sale is exempt. Custom computer software and the portion of pre-written computer software that is modified or enhanced, provided the modification or enhancement is designed and developed to the specifications of a specific purchaser and the charges for the modification or enhancement are separately stated, continue to be exempt. Pre-written computer software or licenses purchased by consumers for personal use are subject to tax. ( Important Notice: Computer Software, North Carolina Department of Revenue, February 2010)
Software that is delivered electronically or by "load and leave" is not taxable. For tax purposes, rentals and leases of computer hardware and software are considered sales. ( Sec. 26-52-304; Sec. 26-53-109, A.C.A.; Reg. GR-25)
Pre-written or modified computer software transferred to the retail purchaser by means of load and leave is not subject to sales and use tax. The transaction is not deemed to be the sale of tangible personal property when the retailer installs the computer software and the computer software does not remain permanently in the purchaser’s possession in a tangible medium after the computer software has been installed. ( Reg. Sec. 560-12-2-.111(6)(a) )
Pre-written software is exempt if delivered electronically or by load and leave. ( RI Gen Laws Sec. 44-18-30(61) ; Reg. SU 09-25 )
Pre-written software delivered electronically is generally taxable as tangible personal property. (N.J.S.A. 54:32B-2(g) ; Reg. 18:24-25.5 ) (Technical Bulletin TB-51R, March 13, 2007) Nevertheless, there is one exception to the taxability of pre-written software delivered electronically. Sales of pre-written software delivered electronically are exempt if the software is to be used directly and exclusively in the conduct of the purchaser's business, trade, or occupation. (N.J.S.A., Sec. 54:32B-8.56(15) ; Reg. 18:24-25.5 ) (Technical Bulletin TB-51R, March 13, 2007)
This exception does not apply, however, if the software is being delivered by a "load-and-leave" method. The transaction is not deemed to be the sale of tangible personal property delivered electronically, and therefore is not exempt, even if the software is to be used directly and exclusively in the conduct of the purchaser's business, trade, or occupation. (Technical Bulletin TB-51R, March 13, 2007)
But make sure there is no tangible property delivered or left behind! If the purchaser of software initially delivered electronically also receives tangible storage media containing the software, then the transaction is not deemed to be a sale of software delivered electronically and is not exempt, even when the software is to be used directly and exclusively in the purchaser's business. (Technical Bulletin TB-51R, March 13, 2007)
California taxes the sale of "canned" computer software, which is software designed and manufactured for general retail sale and not under the specifications or demands of any individual client. ( Sec. 6010.9, Rev. & Tax. Code ) Tax applies whether title to the storage media on which the program is recorded, coded, or punched passes to the customer, or the program is recorded, coded, or punched on storage media furnished by the customer. Tax applies to the entire charge made to the customer, including any license or royalty fees. However, tax does not apply to license fees or royalties paid for the right to reproduce or copy a federally copyrighted program, even if a tangible copy of the program is transferred concurrently with the granting of the right. ( Reg. 1502(f)(1), 18 CCR )
In addition, tax does not apply to sales of canned software that are transmitted electronically from the seller's place of business to or through the purchaser's computer as long as the purchaser does not obtain possession of any tangible personal property in the transaction. Sales of canned software also are not taxable if the software is installed by the seller on the customer's computer. They do not specifically say “Load and Leave” here but we can certainly infer it. However, the load and leave method is taxable if the seller transfers title to or possession of storage media in the transaction or the installation of the program is a part of the sale of the computer. ( Reg. 1502(f)(1)(D), 18 CCR)
FLORIDA (Load and Leave is Taxable Here)
So far, every state we’ve listed here exempts software sold and delivered by means of the Load and Leave method. Florida is not one of those states. But since they have recently published a TAA that addresses this issue on point, we include them in this discussion.
In Florida, software delivered electronically is not considered an exchange of tangible personal property and is not subject to tax. In addition, the charge for furnishing information by way of electronic images appearing on a subscriber's video display screen is neither a sale of tangible personal property nor a sale of a taxable information service. ( Rule 12A-1.062(4), F.A.C, CCH Survey on the Sales and Use Taxation of E-Commerce, Florida Department of Revenue, October 3, 2000)
According to TAA 10A-010 issued 2/16/10, the sale of canned or pre-packaged software delivered to a customer in tangible form, including but not limited to, on a disk or via the load and leave method, is a sale of tangible personal property subject to sales tax. Charges for services, including installation and travel charges, that are part of the sale of tangible canned or pre-packaged software are a part of the sales price and subject to sales tax.