SC REVENUE RULING #96-3 (TAX)
SUBJECT: Electronic Delivery of Computer Software
(Sales and Use Tax)
EFFECTIVE DATE: Applies to all periods open under statute.
SUPERSEDES: All previous documents and any oral directives
in conflict herewith.
REFERENCES: S.C. Code Ann. Section 12-36-910 (Supp. 1995)
S.C. Code Ann. Section 12-36-1310 (Supp. 1995)
S.C. Code Ann. Section 12-36-60 (Supp. 1995)
AUTHORITY: S.C. Code Ann. Section 12-4-320 (Supp.1995)
S.C. Revenue Procedure #94-1
SCOPE: A Revenue Ruling is the Department of Revenue's
official advisory opinion of how laws
administered by the Department are to be applied
to a specific issue or a specific set of facts,
and is provided as guidance for all persons or a
particular group. It is valid and remains in
effect until superseded or modified by a change
in the statute or regulations or a subsequent
court decision, Revenue Ruling or Revenue
Procedure.
Question:
Is computer software sold and delivered by electronic means, as
described in the facts, subject to sales and use tax?
Conclusion:
Computer software sold and delivered by electronic means, as
described in the facts, is not subject to sales and use tax.
Facts:
Technology has progressed to the stage that computer software may
be sold in many forms. Software may be sold in traditional forms
such as computer diskettes or magnetic tapes. Today, technology
also permits computer software to be sold and delivered
electronically as described in the following transaction.
Company A has purchased computer software for its own business
use. No portion of the computer software will be delivered on
computer disks or magnetic tapes. Instead, the software will be
electronically delivered to Company A in South Carolina via a
modem and telephone line.
The purpose of this document is to determine whether computer
software that is electronically delivered in transactions similar
to that described above is subject to South Carolina sales and
use tax.
Discussion:
Code Section 12-36-910(A) imposes a sales tax and reads:
A sales tax, equal to five percent of the gross
proceeds of sales, is imposed upon every person engaged
or continuing within this State in the business of
selling tangible personal property at retail.
Code Section 12-36-1310(A) imposes a use tax and reads:
A use tax is imposed on the storage, use, or other
consumption in this State of tangible personal property
purchased at retail for storage, use, or other
consumption in this State, at the rate of five percent
of the sales price of the property, regardless of
whether the retailer is or is not engaged in business
in this State.
Therefore, for the sales or use tax to apply there must be a
retail sale or retail purchase of tangible personal property.
Code Section 12-36-60 defines the term "tangible personal
property" to mean:
...personal property which may be seen, weighed,
measured, felt, touched, or which is in any other
manner perceptible to the senses. It also includes
services and intangibles, including communications,
laundry and related services, furnishing of
accommodations and sales of electricity, the sale or
use of which is subject to tax under this chapter and
does not include stocks, notes, bonds, mortgages, or
other evidences of debt. (Emphasis added).
Therefore, the term tangible personal property includes the
sale or use of intangibles, including communications, that are
subject to South Carolina sales or use taxes under Chapter 36 of
Title 12.
Communications are subject to sales and use taxes under Chapter
36 of Title 12 pursuant to Code Sections 12-36-910(B)(3) and 12-
36-1310(B)(3), which impose the tax on the:
gross proceeds accruing or proceeding from the charges
for the ways or means for the transmission of the voice
or messages, including the charges for use of equipment
furnished by the seller or supplier of the ways or
means for the transmission of the voice or messages;
(Emphasis added).
For the electronic delivery of software to be subject to sales
and use taxes, it must be determined that the gross proceeds are
derived from the sale of tangible personal property as defined in
Code Section 12-36-60. The term tangible personal property
includes services and intangibles, such as communications, which
are subject to tax under Code Sections 12-36-910 and 12-36-1310.
A review of longstanding administrative policy indicates that
computer software sold and delivered in the form of a computer
diskette or magnetic tape is tangible personal property subject
to taxation. See Citizens and Southern Systems, Inc. v. South
Carolina Tax Commission, 280 S.C. 138, 311 S.E. 2d 717 (1984) and
also SC Revenue Ruling #93-4.
Unlike computer software delivered in the form of a computer
diskette or magnetic tape, computer software sold and delivered
by electronic means cannot be seen, weighed, measured, felt,
touched or is not otherwise perceptible to the senses.
Accordingly, such computer software is an intangible and is
subject to taxation only if it is "communications" taxed under
Chapter 36 of Title 12 pursuant to Code Sections 12-36-910 and
12-36-1310.
The Code, however, does not provide definitions for various terms
or phrase found in Sections 12-36-910(B)(3) and 12-36-1310(B)
(3); therefore, it is necessary to determine their "ordinary and
popular meaning." It is an accepted practice in South Carolina
to resort to the dictionary to determine the literal meaning of
words used in statutes. For cases where this has been done, see
Hay v. South Carolina Tax Commission, 273 S.C. 269, 255 S.E. 2d
837 (1979); Fennel v. South Carolina Tax Commission, 233 S.C. 43,
102 S.E. 2d 424 (1958); Etiwan Fertilizer Co. v. South Carolina
Tax Commission, 217 S.C. 354, 60 S.E. 2d 682 (1950).
The Second College Edition of the American Heritage Dictionary
provides the following definitions:
"Way" - A manner of doing something.
"Means" - A method, course of action, or instrument
by which an act can be accomplished or
some end achieved.
"Transmission" - The act or process of transmitting; the
state of being transmitted; something
transmitted, as a voice or message.
"Transmit" - To send from one person, thing or place to
another; convey;...
In addition, the Second Edition of the American Heritage
Dictionary defines "communications," in part as "a means of
communicating, esp.: a system for sending and receiving messages,
such as mail, telephone or television."
In summary, the statute imposes the sales and use tax on the
gross proceeds accruing and proceeding from the charges for the
manner, methods and instruments for sending a voice message.
Next, it is important to review the statute again to fully
understand, specifically, what is taxed when imposing the tax on
the charges for the manner, methods and instruments for sending a
voice or message. The statute specifically includes, as taxable,
"the charges for use of equipment furnished by the seller or
supplier of the ways or means for the transmission of the voice
or of messages;..."
The following quote is from 73 Am Jur 2d, Statutes Section 250:
In the interpretation of a statute, the legislature
will be presumed to have inserted every part thereof
for a purpose.... A statute should not be construed in
such manner as to render it partly ineffective or
inefficient if another construction will make it
effective. Indeed, it is a cardinal rule of statutory
construction that significance and effect should, if
possible, without destroying the sense or effect of the
law, be accorded every part of the act, including every
section, paragraph, sentence or clause, phrase, and
word....
Applying this rule to the question at hand, it must be presumed
that the phrase "including the charges for use of equipment
furnished by the seller or supplier of the ways or means for the
transmission of the voice or of messages" was inserted in Code
Sections 12-36-910(B)(3) and 12-36-1310(B)(3) by the Legislature
for a special reason, as such charges were already subject to the
tax pursuant to Code Sections 12-36-910(A) and 12-36-1310(A).
Therefore, "charges for the ways or means for the transmission of
the voice or messages" imposes the tax upon something more than
merely communications equipment. If the Legislature had intended
to tax only charges for use of the equipment, then Code Sections
12-36-910(B)(3) and 12-36-1310(B)(3) would have been unnecessary,
as such charges were already taxable.
Therefore, based on the above discussion, it is reasonable to
conclude that charges for the ways or means of communication must
be charges for access to, or use of, a communication system,
whether this charge is based on a fee per a specific time period
or per transmission. (See SC Revenue Ruling #91-10.)
Based upon the statutory language contained in Code Sections 12-
36-910(B)(3)and 12-36-1310(B)(3) and the general meaning of the
term "communication", the Department of Revenue has taxed
communication services such as telephone services, facsimile
transmission services, database access transmission (legal
research, stock quotes, credit reporting), and electronic voice
mail services. All of these communication services and others
currently taxed by the Department of Revenue constitute
communication systems, both large and small, that the purchaser
pays to access or use. (See Commission Decision #89-77 and SC
Revenue Ruling #89-14.)
In addressing whether the computer software is a "communication",
it must be determined whether the purchaser of computer software
sold and delivered by electronic means is paying for access or
use of the communication system (e.g. the telephone). Applying
the "true object test" provides guidance in making this
determination. In this instance, the true object of the sale of
computer software electronically delivered, as described in the
facts, is the sale of the intangible software: the "true object"
is not the access or use of the communication system. To
conclude otherwise stretches the statutory language. Accordingly,
computer software sold and delivered by electronic means, as
described in the facts, does not meet the definition of tangible
personal property set forth in Code Section 12-36-60 or fall
within the provisions of Code Section 12-36-910 or Code Section
12-36-1310.
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