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 www.streamlinedsalestax.org.
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
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
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 http://tax.ohio.gov/.