ALABAMA DEPARTMENT OF REVENUE
SALES, USE & BUSINESS TAX DIVISION
SALES & USE TAX RULE
810-6-1-.37. Computer Hardware and Software.
(1) Computers and related equipment, also known as computer hardware,
consist of components and accessories that make up the physical computer
assembly. The retail sale of computer hardware is subject to sales or use
tax. The rental of computer hardware is subject to rental tax.
(2) The term "computer software" as used in this regulation shall mean
a sequence of automatic data-processing equipment instructions necessary
to solve a problem, and includes both system and application programs and
subdivisions, such as assemblers, compilers, routines, generators and utilities.
(3) The term "canned computer software" as used in this regulation shall
mean software programs prepared, held, or existing for general or repeated
use, including software programs developed in-house and subsequently held
or offered for sale or lease. Canned computer software includes all software,
except custom software programming, regardless of its function and regardless
of whether it is transferred to the purchaser in physical form, via telephone
lines, or by another alternative form of transmission.
(4) Canned computer software is tangible personal property; and, on
and after March 1, 1997, the retail sale or rental of canned computer software
is subject to the sales, use, or rental tax, whether such transaction was
affected by a transfer of title, or of possession or of both, or a license
to use or consume. Unless specifically stated otherwise, the licensing
of canned computer software is considered a retail sale, and not a rental,
and is subject to sales or use tax. The measure of tax upon which the sales,
use, or rental tax is to be computed is the total amount received from
the sale or rental of canned computer software to the customer. Wal-Mart
Stores, Inc. v. City of Mobile and County of Mobile, Alabama Supreme
Court, decided September 13, 1996, substitute opinion released November
27, 1996.
(5) The term "custom software programming" as used in this regulation
shall mean software programs created specifically for one user and prepared
to the specialorder of that user. The term "custom software programming"
also includes programs that contain pre-existing routines, utilities, or
other program components that are integrated in a unique way to the specifications
of a specific purchaser. Custom software programming also includes those
services represented by separately stated charges for modifications to
a canned computer software program when such modifications are prepared
to the special order of the customer. Modification to a canned computer
software program to meet the customer's needs is custom software programming
only to the extent of the modification. Custom software programming is
not subject to tax regardless of the manner or medium of transfer to the
customer since the charge for the custom software programming is a charge
for professional services and the manner or medium of transfer is considered
incidental to the sale of the service.
(6) The provider of custom software programming would owe sales or use
tax on the cost of the tangible medium for transferring the custom software
programming to the customer. Such tangible mediums would include tapes,
cards, discs, compact discs, and any other tangible personal property used
in transferring custom software programming to the customer.
(7) The term "software maintenance agreement/contract" as used in this
regulation shall mean contracts sold in connection with the sale or rental
of canned software and can include any, all, or a combination of the following:
technical consultation (support) services either by telephone or on-site
visits, corrections of errors or malfunctions (bugs) in the canned software,
provisions for enhancements (software upgrades) to the canned software,
revisions to operating manuals for the canned software, and training services.
If the maintenance contract is required as a condition of the sale or rental
of canned software, the gross sales price or gross rental price is subject
to tax whether or not the charge for the maintenance contract is separately
stated from the charge for the canned software. If the maintenance contract
is optional to the purchaser of the canned software, then only the portion
of the contract fee representing enhancements or upgrades and new operating
manuals is subject to tax provided the fees for consultation or support
services, error corrections, and training services are separately stated
and such separate statement is not used as a means of avoiding imposition
of tax upon the actual gross receipts from the furnishing of upgrades or
manuals. If these fees are not separately stated, the entire charge for
the maintenance contract is subject to tax. If the maintenance contract
is optional to the lessee of the canned software, the rental tax will not
apply to the gross receipts derived therefrom.
(8) Maintenance contracts sold in connection with custom software programming,
whether required or optional, or whether or not separately stated, are
not subject to tax. The provider of the custom software programming is
the consumer of any tangible personal property used in producing operating
manuals and would owe sales or use tax on the cost of these items. Section
40-23-2(1)) (Adopted July 2, 1975, amended June 12, 1978, readopted through
APA effective October 1, 1982, amended January 29, 1990, amended February
21, 1997, amended August 21, 1997)
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