Questions and Answers

Identifying Information:Retail sales of computer software
Tax Type:Kansas Retailers' Sales Tax
Brief Description:How have retail sales of computer software been taxed in Kansas over the years?
Keywords:
Approval Date:02/04/2008



Body:

QUESTION: How have retail sales of computer software been taxed in Kansas over the years?

ANSWER: Since the 1960's, Kansas has taxed software sales in a number of different ways. It includes: taxing software sales as sales of tangible personal property; having a specific imposition for software sales; taxing sales of custom software; exempting such sales; taxing sales of operating but not application software; and so forth. Because tracking these changes can be confusing, the department has drawn up a list of the legislative enactments, court decisions, and important department rulings that have affected software taxation over the years. This chronicle provides a convenient starting point for accountants, lawyers, taxpayers, and others who need to review the history of the changes. A summary of the controlling Kansas law that was in place on July 1, 2006 precedes the chronicle, which is set forth in Section II.
Taxation of software in Kansas

I. Taxation of software based on the statutes in place on July 1, 2006.

(a) Impositions on sales of computer software. (1) As of July 1, 2006, Kansas sales tax is imposed on:

(2) Sales tax is also imposed on "sales of tangible personal property at retail within this state." K.S.A. 2006 Supp. 79-3603(a). By definition, "prewritten computer software" is "tangible personal property." K.S.A. 2006 Supp. 79-3602(pp). This means that the retail sale of canned software is taxed under both K.S.A. 2006 Supp. 79-3603(a) and K.S.A. 2006 Supp. 79-3603(s). A "retail sale" is any sale for any purpose other than for resale. K.S.A. 2006 Supp. 79-3602(kk).
(3) "Computer software" is defined as "a set of coded instructions designed to cause a computer or automatic data processing equipment to perform a task." K.S.A. 2006 Supp. 79-3602(g).
(4) "Prewritten computer software" (canned software) is defined as:

(5) Custom software is the converse of "prewritten computer software." That is, it is software "designed and developed by the author or other creator to the specifications of a specific purchaser." See K.S.A. 2006 Supp. 79-3602(cc), quoted in the preceding paragraph. Custom software is not subject to Kansas sales or use tax. A custom software program designed for a particular customer will become canned software if it is offered for sale to another customer.

(b) The impositions on sales of software services and computer maintenance agreements. (1) Kansas sales tax is imposed on:

(2) K.S.A. 2006 Supp. 79-3603(q) imposes sales tax on the services of "repairing, servicing, altering or maintaining tangible personal property." K.S.A. 2006 Supp. 79-3603(r) taxes sales of service or maintenance agreements. By definition, "prewritten computer software" is "tangible personal property." K.S.A. 2006 Supp. 79-3602(pp). This means that a charge for modifying, altering, updating, and maintaining prewritten computer software is taxed under both K.S.A. 2006 Supp. 79-3603(a) and K.S.A. 2006 Supp. 79-3603(s). Fees for installing canned software are taxable. K.S.A. 2006 Supp. 79-3603(p).

(3)(A). The definition of "prewritten computer software" explains what services are not taxed as "modifying, altering, updating or maintaining" prewritten software because the services are performed for a specific customer. The definition provides:

Under this definition, charges for upgrades and enhancements to canned software are taxable unless the upgrades and enhancements are created exclusively for one customer and the charges for them are separately stated and identified on the customer's invoice.
(B). "Software enhancement" generally means any change to a software code to support new or additional requirements. "Software upgrade" generally means replacing existing software with a newer version. Both of these things may be included in a software patch and service pack. Charges for installing canned patches or service packs are taxable. Definitions for these terms often vary depending on the computer-software contract.

II. Chronicle.

(a) August 1, 1969 --- Department of Revenue Bulletin Vol. 11, No. 8. This 1969 bulletin states that the sale of computer software constitutes the sale of tangible personal property, which is taxed at K.S.A. 79-3603(a).

(b) July 1, 1981 --- 1981 House Bill 2005, 1981 Kan. Sess. Laws Ch. 390. Subsection (s) is enacted and levies:

The department requested this amendment because other states had had mixed success litigating whether computer software is tangible personal property whose sale is subject to sales tax or intangible property whose sale is not taxable.

(c) July 15, 1981 --- Notice. The department implements 1981 HB 2005 in a Notice that explains:
(d) March 28, 1986 --- In the Matter of the Protest of Thomas D. Stayer, 239 Kan. 136, 716 P.2d 588 (1986). The Kansas Supreme Court holds in this property tax appeal: Examples of operational programs are Windows, Mac OS, and Linus. Examples of application programs are computer games, word processing software, and spreadsheet software. Distinguishing between the two types of software is often difficult.

(e) February 4, 1988 --- In the Matter of the Appeal of AT&T, 242 Kan. 554, 749 P.2d 1033 (1988). The Kansas Supreme Court holds in this sales tax appeal:

The holdings in Strayer and AT&T had the effect of exempting canned application software from Kansas property tax and sales tax.

6. July 1, 1988 --- 1988 House Bill 2626, 1988 Kan. Sess. Laws Ch. 386. The definition of "sale" is amended to tax "the sale of the use of tangible personal property by way of a lease, license to use or rental thereof regardless of the method by which the title, possession or right to use the tangible personal property is transferred." The definition of "tangible personal property" is expanded by adding the phrase: "Such term (TPP) shall include any computer software program, as described by subsection (s) of K.S.A. 1987 Supp. 79-3603, and amendments thereto." Subsection (s) of K.S.A. 1987 Supp. 79-3603 is amended as follows: (f) July 1, 2002 --- 2002 House Bill 39, 2002 Kan. Sess. Laws Ch. 185, Sec. 6. p. 1137. This House Bill amends K.S.A. 79-3603(s) by striking all of the new italicized language in the above quoted paragraph beginning with the words: "The sale of computer services does not include: (1) The initial sale . . . ." (See italicized language at the end of the preceding quote). The effect of striking this language is to tax sales of custom software.

(g) July 1, 2002 --- Notice 02-10. The department publishes this notice to advise taxpayers how the new tax on custom software will be implemented.

(h) June 9, 2003 --- Notice 03-04. The department publishes this notice to implement the new destination-based sourcing rules.

(i) July 1, 2003 --- 2003 House Bill 2005; 2003 Kan. Sess. Laws Ch. 147, Sec. 6. pp. 1031-2. This bill amends K.S.A. 79-3603(s) as follows:

(j) July 1, 2004 --- 2004 House Substitute for Senate Bill 147, 2004 Kan. Sess. Laws Ch. 171, Sec. 7, p. 1688. This bill amends K.S.A. 79-3603(s) as follows:

The effect of this amendment is to exempt sales of custom software beginning on January 1, 2005.

(k) July 1, 2007 --- Senate Substitute for Substitute for House Bill 2171, 2007 Kan. Sess. Laws Chap. 155, Sec. 19, p. 948. The multiple points of use sourcing provision found at K.S.A 2006 Supp. 79-3671 is repealed.




Date Composed: 02/04/2008 Date Modified: 02/04/2008