DEPARTMENT OF REVENUE [61 PA. CODE CH. 31] Sales and Use Tax; Computer Software, Hardware and Related Transactions [30 Pa.B. 784] The Department of Revenue (Department), under authority contained in section 270 of the Tax Reform Code of 1971 (TRC) (72 P. S. § 7270), proposes to adopt § 31.33 (relating to computer software, hardware and related transactions) to read as set forth in Annex A.
Purpose of Regulation
Under the act of May 7, 1997 (P. L. 85, No. 7), various types of computer services are no longer subject to Sales and Use Tax on or after July 1, 1997. However, certain computer software, hardware and related transactions remain subject to tax. The purpose of this proposed regulation is to provide guidance concerning these transactions.
Explanation of Regulatory Requirements
Subsection (a) sets forth definitions of various terms utilized in the section. The application of tax as it relates to computer hardware is addressed in subsection (b)(1). The application of tax as it relates to computer software, including canned and custom software, is addressed in subsection (b)(2). Exemptions from taxation are addressed in subsection (c).
Affected Parties
Taxpayers obligated to collect or remit Sales and Use Tax relating to computer software and hardware transactions could be affected by the regulation.
Fiscal Impact
The Department has determined that the proposed regulation will have no fiscal impact on the Commonwealth.
Paperwork
The proposed regulation will not generate additional paperwork for the public or the Commonwealth.
Effectiveness/Sunset Date
The proposed regulation will become effective upon final publication in the Pennsylvania Bulletin. The regulation is scheduled for review within 5 years of final publication. No sunset date has been assigned.
Contact Person
Interested persons are invited to submit in writing comments, suggestions or objections regarding the proposed regulation to Anita M. Doucette, Office of Chief Counsel, PA Department of Revenue, Dept. 281061, Harrisburg, PA 17128-1061, within 30 days after the date of the publication of this notice in the Pennsylvania Bulletin.
Regulatory Review
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on February 1, 2000, the Department submitted a copy of this proposed regulation to the Independent Regulatory Review Commission (IRRC) and the Chairpersons of the House Committee on Finance and the Senate Committee on Finance. In addition to submitting the proposal, the Department has provided IRRC and the Committees with a copy of a detailed Regulatory Analysis Form prepared by the Department in compliance with Executive Order 1996-1, ''Regulatory Review and Promulgation.'' A copy of this material is available to the public upon request.
Under section 5(g) of the Regulatory Review Act, if IRRC has objections to any portion of the proposed rulemaking, it will notify the Department within 10 days of the close of the Committees' review period. The notification shall specify the regulatory review criteria which have not been met by that portion. The Regulatory Review Act specifies detailed procedures for review of objections raised, prior to final publication of the regulation, by the Department, the General Assembly and the Governor.
ROBERT A. JUDGE, Sr.,
SecretaryFiscal Note: 15-392. No fiscal impact; (8) recommends adoption.
Annex A TITLE 61. REVENUE PART I. DEPARTMENT OF REVENUE Subpart B. GENERAL FUND REVENUES Article II. SALES AND USE TAX CHAPTER 31. IMPOSITION § 31.33. Computer software, hardware and related transactions.
(a) Definitions. The following words and terms, when used in this section, have the following meanings, unless the context clearly indicates otherwise:
Canned software--All computer software that does not qualify as custom software.
Computer hardware--
(i) Any assembly of physical equipment that is united and regulated by interaction or interdependence to accomplish a set of specific computer system functions.
(ii) The term includes any connected equipment which enables the computer to store, retrieve or communicate to or from a person, another computer or another device, the results of computer operations, computer programs or computer data.
(iii) The term also includes associated parts, which encompass any component of computer system hardware that is used in connection with and that is necessary to the performance of the hardware's operation.
(iv) Examples of computer hardware are: microcomputers; minicomputers; main-frame computers; personal computers; external hard drives; portable disk drives; memory chip; compact disc read only memory (CD-ROM) drives; external modems; printers; scanners; servers; monitors; keyboards; mouses; microphone; network interfaces; network hubs; network routers; motherboards; daughterboards; central processing units; controller cards; internal hard drives; digitizer; internal modems; network interface cards; sound cards; video cards; and network wiring and cables.
Custom software--Computer software designed, created and developed for and to the specifications of an original purchaser.
Original purchaser--The first person for whom the custom software was designed, created and developed, and to whom it was transferred in a sale at retail.
Storage media--The term includes hard disks, compact disks, floppy disks, magnetic tape, cards and another tangible medium used for the storage of computer readable information.
(b) Application.
(1) Computer hardware.
(i) The sale at retail or use of computer hardware is subject to tax.
(ii) The sale at retail or use of the services of repairing, altering or cleaning computer hardware is subject to tax.
(iii) The sale at retail or use of maintenance, service and warranty contracts for computer hardware constitutes prepayment for services to tangible personal property and is subject to tax.
(2) Computer software.
(i) Canned software. The sale at retail or use of canned software, including updates, enhancements and upgrades is subject to tax.
(A) Canned software includes custom software that is transferred pursuant to a sale at retail to any person other than the original purchaser.
(B) Computer software designed, created and developed to adapt or modify canned software to the specific needs of a particular customer does not convert the canned software to custom software. Charges for the custom software or modifications must be reasonable and shall be separately stated on the sales invoice or statement to the customer in order to be exempt from tax.
(C) A vendor's transfer for consideration to a purchaser of the temporary ownership, possession or custody of a storage medium containing canned software for the purpose of being used or recorded by either the purchaser or vendor on the purchaser's computer hardware is subject to tax.
(D) The sale at retail or use of a canned software maintenance contract constitutes a prepayment for services to tangible personal property and is subject to tax. If a canned software maintenance agreement provides that the purchaser is entitled to receive both taxable components, such as canned software updates, enhancements, upgrades, or error corrections, and nontaxable components, such as consultation, support or training services, the charge for the nontaxable component is not subject to tax if that charge is separately stated on the sales invoice.
(ii) Custom software. The sale at retail or use of custom software is not subject to tax. The sale at retail or use of custom software constitutes a purchase of a nontaxable computer programming service.
(A) The sale at retail or use of multiple copies or licenses of custom software to the original purchaser is not subject to tax.
(B) The sale at retail or use of custom software installation, custom software repair and maintenance, custom software updates, enhancements and upgrades that constitute custom software is not subject to tax.
(C) A custom software vendor's purchase of storage media used to transfer custom software to its customers, and the vendor's purchase of any related materials, including documentation and training manuals that are transferred to the customer as part of the sale at retail of custom software, are subject to tax when purchased by the custom software vendor.
(c) Exemptions from tax.
(1) The sale at retail or use of canned software and computer hardware is exempt if purchased by qualified charitable organizations, volunteer fire companies, religious organizations and nonprofit educational institutions, unless the software is used in an unrelated trade or business; by the Federal government; or by the Commonwealth, its instrumentalities or political subdivisions, including public school districts.
(2) The manufacturing, research, mining, processing, public utility, farming, dairying, agriculture, horticulture or floriculture exemptions from tax apply to the purchase of canned computer software and computer hardware predominantly and directly used in these operations.
(3) In accordance with section 201(c)(5) of the TRC (72 P. S. § 7201(c)(5)), the manufacturing and research ex-emption from tax applies to the sale at retail or use of tangible personal property or taxable services by a person engaged in the business of manufacturing or researching canned software, if the property is predominately and directly used by the purchaser in the manufacture or research of canned software.
(i) The creation of custom software does not qualify as manufacturing or research.
(ii) When a purchaser of tangible personal property uses the property to both manufacture canned software and create custom software, the purchaser has the burden of establishing that the tangible personal property is predominately used in the manufacturing or research of canned software.
(4) The sale at retail of canned software and computer hardware to a vendor who will transfer ownership, custody or possession of the canned software or computer hardware for a consideration in the ordinary course of its business is exempt from tax as a sale for resale. Canned software or computer hardware used by a vendor in producing a separate computer product for resale or in providing a service does not qualify as a sale for resale.
[Pa.B. Doc. No. 00-244. Filed for public inspection February 11, 2000, 9:00 a.m.]
