Information Release

ST 2003-06 - Definition of Tangible Personal Property including Prewritten Computer Software  - July 2, 2003

Am. Sub. H.B. 95 contains a number of changes intended to bring Ohio statutes into compliance with the terms of the Streamlined Sales and Use Tax Agreement. Information on the Streamlined Agreement can be found at Effective July 1, 2003, one change that was made in H.B. 95 was the addition of a new definition of "tangible personal property." This definition is to be used for sales and use tax purposes only; it does not apply to other taxes, such as personal property tax.

The Ohio sales tax applies to sales of tangible personal property made in this state. The use tax applies to the storage, use, or consumption of tangible personal property in Ohio. Prior to H.B. 95, the Ohio sales tax statutes did not contain a definition of "tangible personal property." Effective July 1, 2003, a new R.C. 5739.01(YY) was added to the sales tax chapter. That section provides:

"Tangible personal property" means personal property that can be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses. For purposes of this chapter and Chapter 5741, of the Revised Code, "tangible personal property" includes motor vehicles, electricity, water, gas, steam, and prewritten computer software.

That section expressly includes in the definition of tangible personal property, "*** electricity, *** and prewritten computer software." Below is a discussion of these items.


Under R.C. 5701.03, Ohio does not consider electricity to be personal property. As such, sales of electricity were not subject to Ohio sales or use tax. Ohio has a special Kilowatt-hour tax that applies to electricity.

For purposes of conforming to the Streamlined Agreement, R.C. 5739.01(YY) specifies that for sales and use tax purposes, tangible personal property includes electricity. To avoid imposing sales and use tax on sales of electricity, H.B. 95 enacted new language in R.C. 5739.02(B)(7) that provides a sales tax exemption [and, by operation of R.C. 5741.02(C)(2), a use tax exemption] for "sales of electricity delivered through wires." This new exemption is effective July 1, 2003.

Prewritten Computer Software

The term "prewritten computer software" is defined in the Streamlined Sales and Use Tax Agreement. H.B. 95 adopts the Streamlined Agreement's definitions of "computer," "computer software," and "prewritten computer software" as follows in R.C. 5739.01(AAA), (BBB), and (DDD):

(AAA) "Computer" means an electronic device that accepts information in digital or similar form and manipulates it for a result based on a sequence of instructions.
(BBB) "Computer software" means a set of coded instructions designed to cause a computer or automatic data processing equipment to perform a task.


(DDD) "Prewritten computer software" means computer software, including prewritten upgrades, that is not designed and developed by the author or other creator to the specifications of a specific purchaser. The combining of two or more prewritten computer software programs or prewritten portions thereof does not cause the combination to be other than prewritten computer software. "Prewritten computer software" includes software designed and developed by the author or other creator to the specifications of a specific purchaser when it is sold to a person other than the purchaser. If a person modifies or enhances computer software of which the person is not the author or creator, the person shall be deemed to be the author or creator only of such person's modifications or enhancements. Prewritten computer software or a prewritten portion thereof that is modified or enhanced to any degree, where such modification or enhancement is designed and developed to the specifications of a specific purchaser, remains prewritten computer software; provided, however, that where there is a reasonable, separately stated charge or an invoice or other statement of the price given to the purchaser for the modification or enhancement, the modification or enhancement shall not constitute prewritten computer software.

Essentially, the term "prewritten computer software" has the same meaning as the term "canned software" found in Ohio Adm. Code (O.A.C.) 5703-9-46(A)(7). Under that rule, a sale of canned software was considered to be a sale of tangible personal property, as is a sale of prewritten computer software as defined in new R.C. 5739.01(DDD).

R.C. 5739.01(DDD) and O.A.C. 5703-9-46(A)(7) do differ somewhat on the treatment of "customized" software. Under the rule, where canned software that has been modified or customized for a specific consumer is sold in a single transaction, the sale is a sale of tangible personal property if the charge for the modifications is not more than half the price of the sale. It would not matter whether the modification charges were or were not separately stated unless they exceeded half the price of the transaction. Under new R.C. 5739.01(DDD), a reasonable separately stated charge for modifications to prewritten computer software is not part of the prewritten computer software and would be excluded from the tax base. Effective July 1, 2003, until O.A.C. 5703-9-46 is amended, the broader basis for exempting part of the price of a transaction under the new provisions of the statute will control.

The new definition provides that where prewritten computer software is modified for a specific consumer, and there is no separation of charges for the modification, the product remains prewritten computer software. Thus, in any case where the charge for modifications to prewritten computer software is not separately stated, even though the modifications may be extensive, the entire transaction would remain a sale of tangible personal property and be subject to sales or use tax.

If you have questions regarding any matter covered in this release, please call 1-888-405-4039 (Ohio Relay Service for the Speech or Hearing Impaired: 1-800-750-0750), or e-mail us through our web site at