Taxpayer is an Indiana law firm. The Indiana Department of
Revenue ("Department") conducted a sales and use tax audit of
Taxpayer for the years 2008, 2009, and 2010. As a result of the audit, the
Department found that Taxpayer had purchased certain tangible personal property
without paying sales tax on the purchases or accruing and remitting use tax on
the use of the items in Indiana. The Department therefore assessed Taxpayer
additional use tax and interest on items in various categories such as catered
food, office and computer supplies, accommodations, rental of tangible personal
property, soft drinks, newspaper and magazine subscriptions, etc. Taxpayer
protested the assessment of use tax on two categories of transactions: (1)
transactions with a third-party Taxpayer hired to scan certain of its documents
onto compact discs ("CDs"), and (2) Taxpayer's purchase of software
maintenance agreements.
...
Taxpayer protests the assessment of use tax on its purchase
of software maintenance agreements.
The Department's audit states:
Software maintenance agreements were also purchased during
the sample period. The agreements reviewed routinely included software updates
which enabled the software to continue to be functional and a viable product
for the vendor. The vendor's unitary charge for the updates and maintenance
support was not divisible, and as a result these software agreements were
taxable in their entirety. The taxpayer was asked to provide some maintenance
contracts that were not available with the initial review of the invoices.
These contracts were not provided, therefore an assumption was made that these
contracts were taxable. These contracts are taxed per audit following
Information Bulletin #2 which states that optional warranties and maintenance
agreements are subject to tax if the agreement includes a charge for property periodically
supplied.
...
Taxpayer protests that it is not subject to use tax on
purchases of software maintenance agreements it entered into with various
vendors. Taxpayer makes several arguments in support of its protest.
Taxpayer argues that the sales and use tax is imposed on the
retail sale of tangible personal property which does not include optional
maintenance service contracts. The contracts, Taxpayer argues, are
"intangible property" and therefore not subject to sales and use tax.
Taxpayer cites to Maurer v. Indiana Dep't of State Revenue, 607 N.E.2d 985
(Ind. Tax Ct. 1993) for the proposition that the "sale of an intangible
where a tangible personal property may later be provided is not subject to
sales tax." Taxpayer also cites to Letter of Findings 02-0086 for the proposition
that when a taxpayer purchases a software maintenance agreement it has
"merely purchased an intangible right."
Taxpayer's reference to Maurer is misplaced. That case dealt
with a charity's raffle of a car and whether the purchaser of the winning ticket
or the charity that purchased the vehicle to offer as a raffle prize was
responsible for the sales or use tax due on the transfer. The Maurer court
decided that the retail transaction was when the charity purchased the vehicle
from the dealer and therefore the charity, but for being exempt as a
not-for-profit, would have been responsible for paying the sales tax. The
purchaser of the raffle ticket had merely "bought a raffle ticket which
was a representation of an intangible right to win a prize on the happening of
a contingency." Maurer, 607 N.E.2d at 990. The software maintenance
agreements that are the subject of this protest are not "an intangible
right to win a prize on the happening of a contingency." The agreements
represent the assumed provision of tangible personal property in the course of
rendering maintenance services to Taxpayer. Also, there are only two parties to
the agreement in the instant protest, and, but-for, the charity's exempt
status, it would have been liable for sales tax.
As for Letter of Findings 02-0086, the tax years at issue
were 1998 and 1999 and the protests and Letter of Findings relied on a version
of Sales Tax Information Bulletin 2 not relevant to the analysis for the years
at issue in this protest (this point will be further discussed below).
Taxpayer refers also to the treatment of this issue by other
states. While the authority cited by Taxpayer could provide guidance in the
instant case, none of it is binding on Indiana.
Taxpayer then cites to two additional Letters of Findings,
04-20100606 and 04-20100311, which Taxpayer argues are directly on point. These
two Letters of Findings also refer to two versions of Sales Tax Information
Bulletin 2 and their applicability to the taxpayers whose protests were
addressed in those final determinations. However, those Letters of Findings
deal with service maintenance contracts and not the types of software update
agreements at issue in this protest.
Taxpayer points to Sales Tax Information Bulletin 2 as
"outlin[ing] the position of the Legislature and the Department regarding
optional maintenance agreements." An earlier version of Information
Bulletin 2 stated as follows:
Optional warranties and maintenance agreements that contain
the right to have property supplied in the event it is needed are not subject
to sales tax. Any parts or tangible personal property supplied pursuant to this
type of agreement are subject to use tax. Sales Tax Information Bulletin 2 (May
2002), 25 Ind. Reg. 3595 (Emphasis added) (See also Sales Tax Information
Bulletin 2 (November 2000), 24 Ind. Reg. 1192, "Optional warranties and
maintenance agreements that only contain the intangible right to have property
supplied and there is no certainty that property will be supplied are not
subject to sales tax.")
Taxpayer also points to Sales Tax Information Bulletin 2
(December 2006) 20100804 Ind. Reg. 045100497NRA, as further clarification on
the question of whether maintenance agreements were subject to sales tax.
Optional warranties and maintenance agreements that contain
the right to have property supplied in the event it is needed are subject to
sales tax if there is a reasonable expectation that tangible personal property
will be provided. Any parts or tangible personal property supplied pursuant to
this type of agreement are not subject to sales or use tax. The supplier of the
parts or property to this type of agreement is not liable for the use tax on
the parts or property because the supplier is using the material to fulfill the
service called for by the terms of the warranty or maintenance agreements.
(Emphasis added).
...
In the case of the software maintenance agreements, the
interpretations set out in the Sales Tax Information Bulletins are irrelevant.
Instead the interpretation set out in the August 2006 Letter of Findings
governs the issue. The publication of that Letter of Findings met the
requirements set out in IC § 6-8.1-3-3. See Carroll County Rural Elec. Mem.
Co-op. v. Indiana Dep't of State Revenue, 733 N.E.2d 44, 49 n.5 (Ind. Tax Ct.
2000) ("The publication of the Letter of Findings is a prerequisite for
the Department before it can change its position as to the interpretation of a
tax, where the change would increase the taxpayer's liability.")
The Department is not required to discern whether the
maintenance agreement vendors did or did not provide Taxpayer with computer
software updates or whether the underlying agreement guaranteed that updates
would be provided. The Department presumes that updates were provided pursuant
to the agreements.
The software maintenance agreements for which Taxpayer seeks
a refund contain language which – as typical in such agreements – does not
definitively establish whether or not Taxpayer would or would not receive
software updates. However, the Department does point out that the language in
some of the agreements actually reads as follows: "free updates as they
become available"; and "free upgrades as they become available"
which reinforces the point that software updates and upgrades are routinely
provided under such agreements.
The software maintenance agreements at issue provide for
certain computer services and – under certain circumstances – computer software
in the form of updates, upgrades, patches, fixes, versions, modifications,
releases, corrections, and enhancements all of which constitute "tangible
personal property" under IC § 6-2.5-1-27. If the "software
updates" are provided in conjunction with the accompanying services, the
maintenance agreements represent unitary transactions all of which are subject
to sales tax under IC § 6-2.5-4-1(e).
Taxpayer has provided no information establishing that
software updates were not provided pursuant to the agreements it has with its
vendors. Without knowing whether or not tangible personal property was
transferred pursuant to its vendor agreements, Taxpayer's protest must be
denied.
...
The second category of transactions on which Taxpayer
protests the imposition of use tax are itemized payments Taxpayer made to an
Illinois company that scanned Taxpayer's litigation documents onto CDs.
Taxpayer explains, "as detailed in the enclosed
invoices, not only were these charges solely for services, they were charges
for services provided in Illinois, not Indiana." Taxpayer cites to 45 IAC 2.2-4-2(a)
in support of its protest.
Taxpayer argues that any transfer of property in the
rendition of the scanning services is inconsequential and below the requisite
10 percent ceiling stated in the cited regulation. Taxpayer is incorrect.
According to the itemized invoices provided by Taxpayer, the Illinois service
provider charged Taxpayer for various services such as "litigation
imaging," "file naming," and "bookmarking in Adobe."
However, these invoices also show that Taxpayer was charged for CDs. CDs are
tangible personal property. Furthermore, the itemized charges for these CDs are
a higher percentage of the total service charge than the
"inconsequential" 10 percent referenced in the regulation to which
Taxpayer cites. The Department's audit only subjects the charges relating
specifically to the CDs to use tax, not the other charges relating to what are clearly
services.
Up to this point the Department's audit treatment is
correct. However, the Department's audit, as expressed in the audit summary
report, did not establish that these CD's were "used, consumed, or
stored" in Indiana pursuant to the requirements of Indiana's use tax
imposition statute, IC § 6-2.5-3-2. The invoices Taxpayer provided show that
the charges at issue were billed to Taxpayer's office in Illinois.
Absent a specific assertion in the audit summary report that
the CDs were actually used in Indiana, the Taxpayer is correct that the CDs are
not subject to Indiana use tax.
