Is There Sales Tax on Computer Software?

Irene Olsen

Are you planning to purchase computer software but wondering whether you need to pay sales tax on it? The answer is not straightforward as it depends on various factors. In this article, we will explore the topic in detail.

Understanding Sales Tax

Sales tax is a tax imposed by the government on the sale of goods and services. The tax rate varies from state to state and can be imposed at different levels such as state, county, and city. Sales tax is typically added to the purchase price of goods and services at the time of sale.

Computer Software – Tangible or Intangible?

To determine whether sales tax applies to computer software, we need to first understand whether it is considered tangible or intangible property. Tangible property refers to physical items that can be touched and seen such as a computer or a book. Intangible property refers to non-physical items such as patents, copyrights, and trademarks.

Computer software falls under the category of intangible property since it is not a physical item that can be touched or seen. However, some states consider pre-packaged software that comes with a tangible medium such as a CD or DVD as tangible personal property.

State Laws

Each state has its own laws regarding sales tax on computer software. Some states exempt all types of computer software from sales tax while others impose taxes only on certain types of software.

For example, California exempts custom software programming services from sales tax but imposes taxes on pre-written (canned) software regardless of how it is delivered – electronically or through tangible media. On the other hand, Illinois exempts all forms of computer software including pre-written and custom software from sales tax.

Cloud Computing

With the rise of cloud computing, where software is accessed through the internet rather than installed on individual computers, the issue of sales tax becomes even more complex. Some states consider cloud computing services as taxable while others exempt them.

For example, in New York, cloud computing services are subject to sales tax if they provide access to pre-written software. However, if the services are limited to data storage or processing, they are exempt from sales tax.

Conclusion

In conclusion, whether you need to pay sales tax on computer software depends on various factors such as the type of software, how it is delivered, and the laws of your state. It is important to research and understand the sales tax laws in your state before making a purchase.

With this information, you can make an informed decision and avoid any surprises when it comes to paying sales tax on computer software.