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Learn more Intuit ProSeries Tax Streamlined forms-based screens and one-click access to calculation details. Expand All Collapse All. The court largely disregarded the relatively insignificant value of the tape as opposed to its contents and license to use the program, and held that the controlling factor was that the videotape could be seen and was perceptible to the senses.

The court therefore found the videotapes to be squarely within the statutory definition of tangible personal property for sales tax purposes. Precedent in other jurisdictions and the holding in Turner Communications support the Revenue Department's position on software insofar that it holds that the sale of canned or prewritten software is taxable as a sale of tangible personal property.

However, the Department's policy suggests that the Department may have confused the tangible media of software diskettes and the information on the diskettes which is the actual software.

For example, the Department would clearly take the position that a shrink wrapped package would be taxable in the same manner as a record or book. However, if the software which is the information used by the computer were transferred via telephone lines, it is not clear how such a transaction could be subject to sales tax in Georgia.

South Carolina Tax Commission, supra, it appears that the latter transaction may avoid sales tax. See also Chittendon Trust Company v. King, Vt. Contrast Bridge Data Co. Director of Revenue, S. Exemption of Custom Software as Personal Services. Another aspect of the issue is the taxation of custom written software. Georgia exempts personal services from sales tax. Specifically, the applicable provision of the statute provides that taxable "sales at retail" do not include "Professional, insurance or personal service transactions which involve sales as inconsequential elements for which no separate charges are made".

In the context of software, the Georgia Revenue Department has acknowledged that the writing of custom software for a specific customer is a service transaction not subject to sales tax. Canned software distinguished]; Detroit Auto Interinsurance Exchange v. Department of Treasury, Mich. This is consistent with the treatment in California. See Touche Ross v.

State Bd. The court held that since the software was not prepared to the special order of the purchaser, the transfer of property was simply a transfer of a tangible personal asset subject to sales tax]; Navistar International Transp.

The manufacturer argued that since the computer programs were developed for its own use, the subsequent transfer should be a nontaxable transfer of custom computer programs. The court ruled that although the initial custom programming was a service to the taxpayer, it lost the character of a service once the program was completed].

Modification of Prewritten Software. The position taken by the Department of Revenue suggests that prewritten software that is modified, regardless of the extent of modification, would be subject to sales tax. It would seem logical, however, that if the value of the prewritten software is inconsequential compared to the modifications required by the customer, and no separate charge is made for the prewritten software, that the transaction would not be subject to sales tax under the personal service exemption.

As noted above, O. Alternatively, if the pre-written software is sold separately, and tax is paid on that leg of the transaction, the service charge for the service of customization of the software should not be taxable. The current position of the Department of Revenue is also unclear from the standpoint of a software developer who uses prewritten components or modules. Would use of such "prewritten components" cause a software program compiled or assembled for a specific customer to be taxable?

Arguably not, so long as the bulk of the charges to the customer are for the service of the assembly of those modules into a customized package and the modules are not separately sold. Compare General Business Systems, Inc.

State Board of Equalization, Cal. Implications of O. The enactment of O. Collection of Tax by Software Dealer. Assuming then that sales of software are generally subject to sales or use tax in the state, the next issue then arises as to whether the nonresident vendor has applicable Nexus in the destination state. Thus, for instance, in Georgia, under the general statutory definition, any person who sells taxable software in Georgia and has substantial nexus with Georgia will be subject to the general rules regarding collection of tax applicable to dealers.

See O. It is dealers who must keep records and file returns. Failure to do so is a misdemeanor. More generally, the software vendor doing business both outside of the State of Georgia must review to what extent such vendor is, after the decision in Quill Corporation v.

North Dakota, U. Sales Tax Planning for the Software Industry. What can the well advised software company do with this information? Determine Whether the Purchaser is Exempt. In all cases a taxpayer should make an initial determination as to whether a purchaser of software is exempt from sales tax.

For example, sales to certain non-profit organizations, governmental institutions and schools are exempt from tax. The laws in each state differ in this area, and thus the laws should be consulated for each state in which sales occur. Some general guidelines may also be of assistance in determining whether writing of software fits within the personal service exemption. First, computer consultants who write software for a specific customer clearly provide personal services which are not subject to the tax.

In such cases, the purchaser often acquires title to the copyright for the specific application written by the consultant. A closer case arises if a computer consultant retains the copyright to the software. In such a case, the services for the first customer may be exempt as a personal service transaction, but the license of the software to a second customer with slight modifications on the original software may be subject to sales tax.

From a practical standpoint, the distinction may rest on the size and monetary value of the software systems. Again, the question is whether the bulk of the charges are for the service of the customization or for the license of the software itself. The Revenue Department's current stated position would appear to include the licensing of an even a larger system which has been customized, even substantially, for a particular customer.

This could be particularly relevant in the communications industry, in which the licensing of a multi million dollar system is not uncommon and where the licensor may well retain the right to license similar systems to other customers. Transmission of Software Electronically. With some customers, it may be possible to transmit the software electronically without the use of tangible media. The Department of Revenue does not appear to address the issue of whether electronic transmission is exempt from sales tax as not involving a transfer of "tangible personal property".

Certainly cases in other jurisdictions suggest that sales tax would not apply in these cases because of the absence of such tangible media of delivery, see e. The sale of software often involves standardized prewritten software which is transferred to the customer.

Such applications also generally involve substantial consulting services which may be exempt from sales tax. In fact, it is not uncommon that the cost of the standardized software is less than the charges for overall services provided to the customer. In these circumstances, it will be important to document and allocate the costs between the software and the consulting services.

Even assuming the transfer of the software may be subject to sales tax, the consulting services should be exempt from tax as personal service transactions. Of course, the Department of Revenue may attempt to reallocate costs if it appears the taxpayer is making an unreasonable allocation to services. The Taxability Issue. Taxation for ad valorem taxes varies. In some states, all tangible personal property is subject to ad valorem tax but intangible property is not.

In other states, both tangible and intangible personal property are subject to tax. Thus, the question arises whether the software is tangible or intangible property. If the software is utilized in the state where only tangible personal property is taxable but intangibles are not taxable, the question arises as to whether software will be categorized as a taxable tangible personal property or a nontaxable intangible personal property.

In states where both tangible and intangible personal property are taxable, the classification nonetheless remain important because in many states intangible property is taxed at a lower or different rate base than tangible personal property. The Georgia experience prior to the enactment of O. Before O. As noted above in the discussion of taxation of software for sales tax purposes, the Revenue Department itself has drawn a distinction between a so-called "custom" and "canned or prewritten software" for purposes of whether such assets constitute taxable tangible personal property for sales tax purposes.

What is "custom" as opposed to "canned" is less than clear. In Georgia, these ambiguities were resolved by the enactment of O. First, the statute defines computer software as personal property only to the extent of the value of the uninstalled storage medium on or in which it is stored or transmitted.

Next, the statute goes on to define all computer software as an intangible. Taxation of Off The Shelf Software. The Georgia approach codified in O. Where specific software has been standardized, duplicated, shrink-wrapped and inventoried, a la copies of SimAnt or Where in the World is Carmen Sandiego at a retail outlet, it would appear that the actual hard copies constitute tangible personal property and are subject to taxation under the rules generally applicable to inventories.

There is an argument that since the software can and does exist separately from the physical media, that it is not tangible personal property. Compare Jones v. The programming material was not integrally related to the medium which could be destroyed once the software was transferred into the computer]. Alternatively, taxpayers may contend that such inventories should only be valued based upon the value of the actual media on which embodied.

However, other sales tax exemptions may apply to the purchases of advertising agencies, such as purchases related to:.

Note: A Tax Bulletin is an informational document designed to provide general guidance in simplified language on a topic of interest to taxpayers. It is accurate as of the date issued. However, taxpayers should be aware that subsequent changes in the Tax Law or its interpretation may affect the accuracy of a Tax Bulletin. The information provided in this document does not cover every situation and is not intended to replace the law or change its meaning. Skip to main content.