Revenue Ruling

Ruling Number:19-2009-01
Tax Type:Kansas Retailers' Sales Tax
Brief Description:Tax Treatment of Computer Software Maintenance Agreements in Kansas.
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Approval Date:06/02/2009


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KANSAS DEPARTMENT OF REVENUE
Revenue Ruling 19-2009-01

Revised July 1, 2010

Tax Treatment of computer software maintenance agreements in Kansas

Software maintenance agreements. A “computer software maintenance contract” is a contract that obligates a vendor of canned (prewritten) computer software to provide a customer with future updates or upgrades to canned computer software, support services with respect to canned computer software, or both. This definition includes a contract sold by a person other than the vendor of the computer software to which the contract relates. The products or services may include some or all of the following:

Mandatory computer software maintenance agreements sold with canned (prewritten) software. A “mandatory computer software maintenance contract” is a computer software maintenance contract that the customer is obligated by contract to purchase as a condition to the retail sale of canned computer software. Mandatory computer software maintenance agreements are treated as part of the software sale and are subject to Kansas sales or use tax. Taxable charges include any separately-stated charges for technical-support services.

Optional computer software maintenance agreements sold with canned (prewritten) software. An “optional computer software maintenance contract” is a computer software maintenance contract that the customer is not obligated to purchase as a condition to the retail sale of canned computer software. When a customer agrees to buy an optional maintenance agreement during negotiations for canned software, charges for the optional maintenance agreement are characterized as 50% for taxable software in a bundled transaction in which the taxable and nontaxable products are not separately itemized on the invoice or billing document. When charges for technical-support services are separately stated or when the agreement clearly states that only technical-support services will be furnished, such charges are not taxable.
A charge for an upgrade from a "basic" to a "premium" maintenance agreement is not subject to sales tax if the agreement clearly states that the upgrade is for technical-support services only. Without this statement, the charges for the upgrade are characterized as 50% for taxable software in a bundled transaction in which both the taxable and nontaxable products are not separately itemized on the invoice or billing document.

Optional computer software maintenance agreements sold separately from or after the software sale. A computer software maintenance agreement may be sold by the software vendor after the software sale is completed or by a different vendor. Charges for these agreements are characterized as 50% for taxable software in a bundled transaction in which both taxable and nontaxable products are not separately itemized on the invoice or billing document. When the agreement clearly states that only technical-support services will be furnished, such charges are not taxable. The sale of a computer software maintenance agreement that is not sold contemporaneously with a software purchase is sourced according to K.S.A. 79-3670. See K.S.A. 2009 Supp. 79-3602(cc).

Separately-stated charges for upgrades and enhancements. Whether separately stated or not, charges for upgrades and enhancements for canned software are taxable because upgrades and enhancements are, by definition, prewritten computer software. See definition of "prewritten computer software" at K.S.A.2009 Supp. 79-3602(cc). Sales of copies of operating-manual updates are taxable sales of tangible personal property.

Maintenance agreements for custom software. Whether mandatory or optional, maintenance agreements for custom software are not taxable.

Revenue Ruling 19-2009-01 became effective on and after January 1, 2009. Revised Revenue Ruling 19-2009-01 is effective from and after July 1, 2010 and replaces and supersedes all prior advice, revenue rulings and other rulings that have been issued regarding this issue, to the extent inconsistent herewith.

Secretary of Revenue


Joan Wagnon


Date Composed: 06/03/2009 Date Modified: 06/03/2009