Taxability Of Software
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More Podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
When determining the taxability of software, there are a number of factors to look at. Most commonly, these include the medium of delivery, the state in question, and whether or not the software is going to be used 100% for business purposes.
For these reasons, it is important for businesses to stay on top of changes in taxability rules in their respective states. This is especially true when dealing with downloadable software or in cases where the software is used as a service. Luckily, Michael J. Fleming of Sales Tax and More is here to help.
In this episode of Sales Tax and More, Michael J. Fleming is interviewed by his co-host Ellie Moffat about whether or not software is taxable.
Michael shares the factors that determine taxability, what different states take into account, and how Sales Tax and More helps businesses handle the taxation of their software. Stay tuned.
Here’s a glimpse of what you’ll learn:
Is software taxable and if so, what does it depend on?
Why the medium of a software plays a big part in determining taxability
Michael J. Fleming talks about custom versus canned software
How the source of a sale affects the taxability of a software
Where to learn more about Sales Tax and More
Resources Mentioned in This Episode
Ellie Moffat's email: emoffat@salestaxandmore.com
Connect with Michael
Sponsor for This Episode
Sales Tax and More assists companies and their trusted advisors like CPAs with sales tax needs. They offer consulting and research, registrations, returns, and so much more. Over the years they have assisted thousands of sellers both foreign and domestic with their tax issues in the United States and in Canada.
To learn more about their services, visit https://www.salestaxandmore.com/.
Make sure to register and join the Sales Tax and More Webinar to get access to complex materials on tax in an easy-to-understand format.
Episode Transcript - Audio Version
[0:10] Intro: Welcome to Sales Tax and More, your go-to resource for all things state tax-related. Now here is your host, Michael Fleming.
[0:26] Mike: Hi, Mike Fleming here, founder of Sales Tax and More and today's co-host of the Sales Tax and More Podcast, where we talk about everybody's favorite topic, which is of course sales tax. Today, my co-host is going to interview me about whether software is taxable or not, and what factors we need to look at in order to help make that determination. So, you know, before we get started, I want to introduce you to Ellie.
[0:54] Ellie: Hey, everyone, it's really great to be here. We have a really great episode today and before I get started, I want to do a quick introduction for Sales Tax and More. So Sales Tax and More is a full-service consulting and solutions firm. We have a really great team here of experienced tax professionals who are very dedicated to fulfilling your state tax or related needs. So we do a lot of sales, tax returns, registrations, consultations, research, and like our name states more. So if you have questions about our services, please reach out and ask and we are happy to answer those questions. And we will give you many ways to get in touch with us. So, Mike, I know we get a lot of questions about software and if it's taxable or not. And I think I know the answer here, but I want to see what you have to say about it.
[1:44] Mike: Okay, so Ellie, that's a great question. And you know what my favorite answer is, it depends.
[1:51] Ellie: The most classic answer we have around here. I knew it. So what does it depend on?
[1:58] Mike: Well, first of all, you know, as usual, it depends on the state because each state is going to look at software a little bit differently. But it also heavily depends on the method of delivery. So in most states, just about all states, if it's delivered on a tangible medium, like a disk or a thumb drive or you know floppy, or if you aren't really old school, then it's going to be taxable. The next method of delivery is, you know, downloaded electronically, in some states are going to taxes, some states are not going to tax it. Then there's a method called load and leave and that's where, you know, someone comes on-site there, they install the software, and then they take all of the tangible personal property away with them. So load and leave is going to be taxable in some states, not taxable in other states. And you know, more recently we've got, you know, remotely access software. So that's a software as a service. So how it's delivered plays a big, big part on whether it's going to be taxable or not.
[3:14] Ellie: Why does it depend on the median so much, Mike?
[3:18] Mike: Well, you know, if you think back, historically, only tangible personal property was pretty much taxed. So as software started to become bigger and bigger, the state saw a lot of money there and they said, how can we start looking at this because software, you know, and looking at it, and taxing it, because software wasn't really tangible personal property. I mean, it's not something you know, you can see you can feel you can touch, you can smell, you know, with some bunch of code is really what it is. So, the states, some of them started saying, Well, if it's delivered on tangible personal property, then we're going to say that that's taxable. Other states came out and they changed their definition of tangible personal property to include software. So a state like Texas is going to say, no matter how the software is delivered, it's going to be taxable doesn’t matter if it's downloaded you know. By definition, all software is taxable in a state like Texas wherein in a state like California, if it's delivered on tangible medium, then it's going to be taxable. If it's electronically downloaded or load and leave or accessed remotely, then it's not going to be taxable. So, you know, states are constantly trying to keep up with this technology and figure out ways to tax it. I always say that you know, states are not stupid. They're just a little bit slow to react sometimes. And, you know, they've got to get their arms around this. So, but that's one of the reasons why the method of delivery matters so much.
[5:15] Ellie: Okay, so, is there anything else it depends on?
[5:20] Mike: Yes, of course. It matters whether it's what we call pre-written, or whether it's canned and canned software, you know, that's you can go in, you buy it off a shelf, or you know, it's sold to the masses, that's generally going to be taxable depending on the method of delivery. Whereas custom software is often viewed more as a service. You know, someone's creating software specifically for you. And in most states, not all states. There's just a case in Alabama where they said, Hey, software is software doesn't matter if it’s custom or doesn't matter if it's canned. It's all going to be taxable. So, you know, whether it's customer canned. Customer Canned means pre-written, you know, that has a major factor?
[6:15] Ellie: Well, this has been a lot of depends, is that it?
[6:20] Mike: Nope, that would be too easy. You know, each state has more depends. So some states it matters whether or not it's going to be used 100% in the business. For example, in New Jersey, if something is electronically downloaded, and it's used 100% for business purposes, then that's not going to be taxable. If it's delivered on a tangible medium and used in a business, that's still taxable, if it's electronically downloaded, and it's used partially for personal use or all for personal use, that's still going to be taxable. So The method of delivery and whether it's used for businesses is going to be a big part. How it's invoiced. You know, sometimes you can take nontaxable software, combine it with tangible personal property in some states, now the whole charge becomes taxable. So you got to look at how it's being invoiced, you know, that can play a major role. Is the form of delivery pure? A lot of people tell me that they, you know, have software as a service. But as we're going through it, you know, there's some component that needs to be downloaded to the desktop or to the server. And if that's the case, then that can change the taxability. It's no longer remotely accessed, you're downloading something, and that can make it taxable, whether it's sold, outright licensed, or sold on a subscription basis, all of these items can impact taxability. You know, I could go on and on but at this point, I think you get the point. It gets very, very granular. And it's something that you know, you really have to take a look at all of the different factors out there.
[8:19] Ellie: So, to summarize here, I think what you're saying is that this is a lot more complicated than most people think. Is that correct?
[8:28] Mike: Oh, absolutely. And, you know, we haven't even talked about the sourcing of the sale yet. You know, what happens if you're selling software, and your customer is downloading it, but you know, they're downloading it all across the country. So how do you source that sale? What states rate do you tax? And a lot of states allow what's called the multiple points of use tax, excuse me multiple points of use certificate and what this is saying is that hey, you know, we're being billed at this address, but we're going to use this software all across the state. And if you get that certificate then you don't have to charge tax at all. And it's up to the customer to know, self-assess use tax and each state they're using this software. So you know, it's something that can even get more complicated and it's not just for the sellers of software. What happens if you're purchasing the software? Sometimes you'll say well, you know, use this address as my billing address and think that you are, you know, not paying the tax you may have you know, the billing address in a state that doesn't charge tax. You know, this is a big issue when an audit is going on. They look not only at your sales to make sure that you're you know, collecting all the tax you should and remitting all the tax but they are looking at your purchases and large software purchases become a major problem. If they know that you're using software in their state, you haven't, you know, paid sales tax on it or if you haven't self-assessed US tax, that's an issue. So, you know whether software is taxable is not just an issue for software companies, but anyone who's using software also, you got to know where the tax needs to be paid, and if you need to self-assess and remit that use tax.
[10:33] Ellie: Okay, well, I think that this is a pretty good example that when we say it depends, we really mean it depends. Mike, do you have any closing comments here?
[10:42] Mike: Yeah, absolutely. So as I alluded to earlier, the states are constantly trying to catch up to new technology, and they're constantly changing their taxability rules. So this is not something that you want to set it and forget. It's something you need to stay on top of, especially with downloaded software and with software as a service, so you got to review it regularly. And you know, we've got a lot of great charts in our salt vault, which is a premium portion of our website, we're soon going to be coming out with a two-hour webinar that provides two CPE credits that is devoted entirely to the taxability of software. So those are some of the resources you have, but whether you use our resources, this is something that you've got to stay on top of. So if you subscribe to your own research sources, that's great. Just don't think what worked, you know, three years ago necessarily works today. So you know, whether you check on this annually or more frequently. that's entirely up to you But we generally suggest that you do have to follow up on this and in most instances annually is going to be fine.
[12:09] Ellie: Thank you so much, Mike. And I just want to put out there that if you have sales tax needs, we do offer many solutions and services. You can reach out to me directly if you have questions. My email is emoffat@salestaxandmore.com. You can also visit our website at www.salestaxandmore.com. We offer a lot of webinars, a whole series of them are free, that provide CPE credit as well. And we're really grateful to have you join us for our podcasts, for webinars, for you to get on our website and check out those resources as well. Mike, do you have anything else you want to say here?
[12:53] Mike: Thanks, everyone for joining us, and we hope to see you on the next episode of the Sales Tax and More podcast.
[13:00] Outro: Thanks for listening, be sure to click subscribe and check out all of the resources we have out on the web.