March 9, 1983

You inquire about the application of the sales and use taxes to a contract, characterized by the parties as a "software service agreement," between ******************** ("Company A") and ******************** ("Company B").

The contract requires Company B to provide assistance in "installation of existing data processing applications," to make software modifications as requested, to provide consultation and assistance in the use of existing and new applications, to provide telephone "hot line" consultation, and to provide certain classroom instruction, for one year or until Company B expends 25 hours of work under the agreement, whichever first occurs.

Under the contract, Company B has modified certain programs, recorded the modifications on magnetic discs, and transferred the discs to Company A. Company B has also performed other work under the contract, but Company B has not separately stated on its bill to Company A any charges not attributable to the program modifications.

In determining the sales price of property on which the sales tax is based, no deduction may be taken on account of the cost of materials used, labor or service cost, interest charges, losses or other expenses, and any amount paid for any services that are a part of a sale must be included (G.L. c. 64H, § 1(14)).

Transfers of custom programs recorded on magnetic discs generally are subject to the sales tax ( see Subsection (6) of Sales and Use Tax Regulation 830 CMR 64H.06).

Based on the foregoing, it is ruled that the charge for program modifications recorded on magnetic discs, and for related work not separately billed, is subject to the sales or use tax.

Very truly yours,

/s/Ira A. Jackson

Ira A. Jackson
Commissioner of Revenue

LR 83-13