Which States Require Sales Tax on Downloadable Custom Software?

by | Dec 10, 2019

Which States Require Sales Tax on Downloadable Custom Software?

This blog addresses which states require sales tax on downloadable custom software. Custom computer software is typically developed specifically for one user and prepared to the special order of that user.

Many states do not require sales tax on custom software either because it is delivered electronically or is considered a nontaxable service. Some states treat custom software as a taxable service, or require sales tax on all computer software, regardless of whether it is custom, prewritten, downloaded or delivered through tangible media.

 

State Requirements Regarding Sales Tax on Downloadable Custom Software

Below you will find state-by-state information regarding which states require sales tax on downloadable custom software.  This is a long read with a lot of information. If you are interested in finding information about a specific state, you can just follow the links below to jump close to the information regarding that state. 

 

Jump Ahead to Individual State Downloadable Custom Software Requirements:

Alabama

Does Alabama require sales tax on Downloadable Custom Software?

Alabama does not require sales tax on downloadable custom software.

Why does Alabama not require sales tax on Downloadable Custom Software?

Alabama defines custom software as programs created specifically for one user. This includes original software and canned software that has been modified and prepared based on the special order placed by a customer. Custom software, whether delivered electronically or on a tangible medium, is considered tax-exempt in Alabama because it is intended for a single user and not a general, repeated sale.

Where can you go to learn more about why Alabama does not require sales tax on Downloadable Custom Software?

AL 810-6-1-.37(6) addresses custom software and custom software programming-related services.

 

Arkansas

Does Arkansas require sales tax on Downloadable Custom Software?

Arkansas does not require sales tax on downloadable custom software.

Why does Arkansas not require sales tax on Downloadable Custom Software?

The state defines custom software as software designed by the creator to the specifications of a specific user. Any custom software that is delivered through electronic means or via the “load and leave” method is not considered tangible personal property nor subject to sales tax. However, it is only tax-exempt if separately stated on the invoice from charges for manuals, disks, CDs or other tangible property, which is taxable. The “load and leave” method of delivery refers to delivery to the purchaser through a tangible storage media that is not physically transferred to the purchaser.

Where can you go to learn more about why Arkansas does not require sales tax on Downloadable Custom Software?

AR G.R. 25 defines computer software and taxability; A.C.A. § 26-52-304 states that computer software does not include that which is delivered electronically.

 

Arizona

Does Arizona require sales tax on Downloadable Custom Software?

Arizona does not require sales tax on downloadable custom software.

Why does Arizona not require sales tax on Downloadable Custom Software?

Custom software is considered an original creation of an electronic data processing program for the specific use of an individual customer. It falls under the nontaxable service activity which includes assessing needs, designing specifications, and developing and writing the program for a specific user. Arizona does not differentiate between custom software delivered via download or tangible media.

Where can you go to learn more about why Arizona does not require sales tax on Downloadable Custom Software?

AZ R-15-5-154 defines custom software as originating from a nontaxable service activity. 

 

California

Does California require sales tax on Downloadable Custom Software?

California does not require sales tax on downloadable custom software.

Why does California not require sales tax on Downloadable Custom Software?

California defines custom software as that which is prepared for the special order of the customer. It can incorporate pre-existing routines, utilities or similar components. The state advises that custom software, regardless of the form in which the program is transferred (i.e. electronically or via tangible media), is not taxable.

Where can you go to learn more about why California does not require sales tax on Downloadable Custom Software?

CA BTLG Reg. 1502 addresses the sale and lease of computer software and data processing services.

 

Colorado

Does Colorado require sales tax on Downloadable Custom Software?

Colorado does not require sales tax on downloadable custom software.

Why does Colorado not require sales tax on Downloadable Custom Software?

Colorado defines computer software as tangible personal property only if it is prepackaged for repeated sale or license; the use is governed by a tear-open, non-negotiable license agreement; and, is delivered to the customer in a tangible medium. A tangible medium is defined as a disk, tape, compact disk, card or comparable physical medium. Based on this definition of tangible personal property, downloadable custom software delivered electronically or via the “load and leave” method does not fall within the description and is considered tax-exempt. 

Where can you go to learn more about why Colorado does not require sales tax on Downloadable Custom Software?

C.R.S. 39-26-102 defines computer software that is considered tangible personal property.

 

Connecticut

Does Connecticut require sales tax on Downloadable Custom Software?

Connecticut requires sales tax on downloadable custom software.

Why does Connecticut require sales tax on Downloadable Custom Software?

Connecticut defines custom software as that which is prepared as a special order of a single customer and considers it a computer and data processing service. The state adds that the design, creation, or development of custom software, or the adaptation or modification of canned software to the particular needs of a single customer, are taxable services.

Where can you go to learn more about why Connecticut requires sales tax on Downloadable Custom Software?

CT P.S. 2006(8) is a policy statement on the taxation of computer software and services; CT Special Notice 2019(8) addresses the taxation of digital products and software.

 

District of Columbia

Does the District of Columbia require sales tax on Downloadable Custom Software?

The District of Columbia requires sales tax on downloadable custom software.

Why does the District of Columbia require sales tax on Downloadable Custom Software?

D.C. passed emergency legislation indicating that all electronically or digitally delivered, streamed, or accessed digital products are subject to sales and use tax effective Jan. 1, 2019.

Where can you go to learn more about why the District of Columbia requires sales tax on Downloadable Custom Software?

D.C. Title 9 Sec. 474.4 discusses the taxation of data processing services. D.C. Act 22-556 is the emergency legislation passed regarding the taxability of digital products.

 

Florida

Does Florida require sales tax on Downloadable Custom Software?

Florida generally does not require sales tax on downloadable custom software.

Why does Florida not require sales tax on Downloadable Custom Software?

Florida requires sales tax on computer software delivered on tangible personal property. Technical Assistance Advisement 02A-52 states that electronically transmitted software is not subject to sales tax because it does not involve the exchange of tangible personal property. In these instances, the downloadable software is considered a service. Additionally, any service warranties offered on electronically transmitted software are also exempt from sales tax. However, should any tangible personal property be included in the sale, the full sale is considered subject to sales tax. However, a Technical Assistance Advisement by Florida is similar to a Private Letter Ruling and only applicable to the specific situation addressed by the advisement. If you sell downloadable custom software in Florida, we recommend a Technical Assistance Advisement to address your specific situation.

Where can you go to learn more about why Florida does not require sales tax on Downloadable Custom Software?

FAC 12-1.032 and TAA 02A-52 address the taxability of downloadable computer software.

 

Georgia

Does Georgia require sales tax on Downloadable Custom Software?

Georgia does not require sales tax on downloadable custom software.

Why does Georgia not require sales tax on Downloadable Custom Software?

Georgia defines custom computer software as computer software, including custom updates, which is designed and developed by the author to the specifications of a specific purchaser. Rule 560-12-2-.111(3) states that custom computer software is considered a professional service transaction and not subject to sales and use tax. This holds true even if a tangible copy of the software is given to the purchaser. Also, Rule 560-12-2-.111(4) states that any computer software delivered electronically is not considered tangible personal property and not subject to sales tax.

Where can you go to learn more about why Georgia does not require sales tax on Downloadable Custom Software?

Rule 560-12-2-.111 addresses the sale of custom software.

 

Hawaii

Does Hawaii require sales tax on Downloadable Custom Software?

Hawaii does not have a sales tax but does have a general excise tax, which is required for downloadable custom software.

Why does Hawaii not require sales tax but requires general excise tax on Downloadable Custom Software?

Hawaii requires a general excise tax on certain transactions and activities. The state does not differentiate between software delivered electronically or on tangible media, nor do they differentiate between the taxability of canned versus custom software. The state requires tax on all software used by a consumer.

Where can you go to learn more about why Hawaii does not require sales tax but requires general excise tax on Downloadable Custom Software?

Hawaii Sec. 237-13-23.5 identifies non-exempt transactions subject to general excise tax. You can also learn more about Hawaii’s General Excise Tax on this blog

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Iowa

Does Iowa require sales tax on Downloadable Custom Software?

Iowa generally requires sales tax on downloadable custom software.

Why does Iowa require sales tax on Downloadable Custom Software?

Iowa recently passed Senate File 2417, which amended tax law to identify all computer software as a digital product subject to sales tax, including that which is electronically transferred and downloaded. The exception to this rule is Subsection 103(a), computer software furnished to a commercial enterprise for use exclusively by the commercial enterprise.

Where can you go to learn more about why Iowa requires sales tax on Downloadable Custom Software?

Iowa Code 423.1(11) defines computer software as a set of coded instructions designed to cause a computer or automatic data processing equipment to perform a task. Electronically transferred is defined as being obtained or accessed by the purchaser by means other than tangible storage media, including but not limited to a specified digital product purchased through a computer software application or through any other means. Iowa SF2417 recently overruled previous law and identifies computer software as tangible personal property subject to sales tax.

 

Idaho

Does Idaho require sales tax on Downloadable Custom Software?

Idaho does not require sales tax on downloadable custom software.

Why does Idaho not require sales tax on Downloadable Custom Software?

Idaho Statute 63-3616(b) specifically lists custom computer programs as not considered tangible personal property. This statute also defines custom computer programs as those which are written or prepared exclusively for a customer and includes those services represented by separately stated charges for the modification of existing prewritten programs when completed exclusively for a specific customer. IDAPA 35.01.02.27.11 also states that custom software, regardless of the form or means by which the program is transferred, is not subject to sales tax. The tax does not apply to the transfer of the custom software or programming services performed. However, if the services or custom software are not separately stated from the charges for computer equipment, they are considered part of the taxable sale. 

Where can you go to learn more about why Idaho does not require sales tax on Downloadable Custom Software?

Idaho Statute 63-3616(b) states that custom computer programs are not considered tangible personal property. IDAPA 35.01.02.27.01(f) defines custom software as that designed and written by a vendor at the specific request of a client to meet a particular need.

 

Illinois

Does Illinois require sales tax on Downloadable Custom Software?

Illinois does not require sales tax on downloadable custom software.

Why does Illinois not require sales tax on Downloadable Custom Software?

Illinois considers all custom computer programs to be tax-exempt so long as the following elements are present: (1) preparation or selection of the program for the customer’s use requires an analysis of the customer’s requirements by the vendor; and (2) the program requires adaptation by the vendor to be used in a specific work environment. The custom program does not include canned or prewritten programs held for general or repeated sale or lease. A modification of prewritten software to the specific needs of a customer is considered custom software. 

Where can you go to learn more about why Illinois does not require sales tax on Downloadable Custom Software?

86 Ill. Adm. Code 130-1935(c) defines custom computer programs as those prepared to the special order of the customer.

 

Indiana

Does Indiana require sales tax on Downloadable Custom Software?

Indiana does not require sales tax on downloadable custom software.

Why does Indiana not require sales tax on Downloadable Custom Software?

Indiana Information Bulletin #8 states that, as a general rule, transactions involving computer software in the form of a custom program specifically designed for the purchaser are not subject to Indiana sales and use tax, regardless of how the software is delivered. 

Where can you go to learn more about why Indiana does not require sales tax on Downloadable Custom Software?

Indiana Information Bulletin #8 addresses the application of sales tax to computer hardware, software, and digital goods. This bulletin also defines custom computer software.

 

Kansas

Does Kansas require sales tax on Downloadable Custom Software?

Kansas does not require sales tax on downloadable custom software.

Why does Kansas not require sales tax on Downloadable Custom Software?

Kansas states that if the software is designed, written and sold to a specific customer for the customer’s exclusive use, the sale is not subject to tax. Kansas does not differentiate between custom software delivered electronically or on a physical storage media. 

Where can you go to learn more about why Kansas does not require sales tax on Downloadable Custom Software?

Kansas Information Guide EDU-71R addresses the taxability of computer software. Custom software is defined as software solely designed for one customer.

 

Kentucky

Does Kentucky require sales tax on Downloadable Custom Software?

Kentucky does not require sales tax on downloadable custom software.

Why does Kentucky not require sales tax on Downloadable Custom Software?

Kentucky identifies charges for custom software as not subject to tax in its Sales Tax Facts publication. KY G.S. 139-010 does not specifically define or address custom software, but only identifies prewritten software as tangible personal property subject to sales tax. Custom software is excluded from this definition. 

Where can you go to learn more about why Kentucky does not require sales tax on Downloadable Custom Software?

KY Sales Tax Facts (pub. Sept. 2007) addresses the taxation of computer software. This publication defines custom software as software tailored solely to the needs of an individual customer.

 

Louisiana

Does Louisiana require sales tax on Downloadable Custom Software?

Louisiana does not require sales tax on downloadable custom software

Why does Louisiana not require sales tax on Downloadable Custom Software?

Tangible personal property is defined as any personal property that can be seen, weighed, measured, felt or touched, or is in any other manner perceptible to the senses. Custom software is defined by the state as software prepared, created, adapted, or modified to the special order of a particular purchaser. Under Louisiana law, custom software is not subject to sales tax regardless of the method of delivery.

Where can you go to learn more about why Louisiana does not require sales tax on Downloadable Custom Software?

LA Revenue Information Bulletin No. 11-005 advises that custom computer software is not subject to sales tax. LA Sales Tax Statutes and Regulations 47:301(16)(a) defines tangible personal property as any personal property that can be seen, weighed, measured, felt or touched, or is in any other manner perceptible to the senses. LA Revenue Information Bulletin No. 02-008 also states that custom computer software is excluded from the definition of tangible personal property. 

 

Still More Information on Which States Require Sales Tax on Downloadable Custom Software

You still hanging in there?  We aren’t done yet!  There is still more information on which states require sales tax on Downloadable Custom Software. Remember, you can just follow the links at the top of the post to jump close to the information regarding any states.  

 

Maine

Does Maine require sales tax on Downloadable Custom Software?

Maine does not require sales tax on downloadable custom software.

Why does Maine not require sales tax on Downloadable Custom Software?

Maine defines custom computer software as that which is written or prepared exclusively for a particular customer. It does not include canned or prewritten software that is held or exists for general or repeated sale. Sec. 1752(17) specifically excludes custom computer software from the definition of tangible personal property subject to tax.

Where can you go to learn more about why Maine does not require sales tax on Downloadable Custom Software?

Maine Title 36, Sec. 1752(1-E) defines custom computer software programs.

 

Maryland

Does Maryland require sales tax on Downloadable Custom Software?

Maryland does not require sales tax on downloadable custom software.

Why does Maryland not require sales tax on Downloadable Custom Software?

Maryland states that sales and use tax does not apply to a sale of custom computer software services relating to procedures and programs that would otherwise be taxable, are intended for a specific person, are created for that person, and do not constitute a program that is mass-produced and sold to the general public.

Where can you go to learn more about why Maryland does not require sales tax on Downloadable Custom Software?

MD Sec. 11-219(b) identifies the exemption for custom computer software programs.

 

Massachusetts

Does Massachusetts require sales tax on Downloadable Custom Software?

Massachusetts does not require sales tax on downloadable custom software.

Why does Massachusetts not require sales tax on Downloadable Custom Software?

Custom software is defined as a software program prepared to the special order of a customer that is not prewritten software. 830 CMR 64H.1.3(6)(a) states that sales of custom software are generally exempt from sales tax as a professional service transaction regardless of the method of delivery. It defines professional service transactions for custom software as one in which the principal object of the purchaser is the professional and personal service of a programmer, systems analyst or other person who imprints or has imprinted the result of the services on magnetic media, the cost of which is an inconsequential element of the cost of the entire transaction.  

Where can you go to learn more about why Massachusetts does not require sales tax on Downloadable Custom Software?

830 CMR 64H.1.3 defines custom software and addresses the taxability of all custom software regardless of method of delivery.

 

Michigan

Does Michigan require sales tax on Downloadable Custom Software?

Michigan does not require sales tax on downloadable custom software.

Why does Michigan not require sales tax on Downloadable Custom Software?

Michigan defines computer software as a “set of statements or instructions that when incorporated in a machine usable medium is capable of causing a machine or device having information processing capabilities to indicate, perform, or achieve a particular function, tax or result.” RAB 1999-5 states, “computer software originally designed for the exclusive use and special needs of the purchaser” is not considered tangible personal property and therefore is not subject to tax. Custom software falls within this definition and is therefore tax-exempt in Michigan. 

Where can you go to learn more about why Michigan does not require sales tax on Downloadable Custom Software?

Michigan RAB 1999-5 discusses the taxability of computer software. 

 

Minnesota

Does Minnesota require sales tax on Downloadable Custom Software?

Minnesota does not require sales tax on downloadable custom software.

Why does Minnesota not require sales tax on Downloadable Custom Software?

Minn. R. 8130.9910(2) states that sales tax is not due on the sale, lease or license of a custom computer program regardless of method of delivery. The sale of a custom computer program is a service transaction and any transfer of tangible personal property is incidental to the service being performed. The state considers it a service because the purpose of the transaction is to obtain “personalized service and the expert knowledge of the program creator.” Maintenance furnished for custom software is also not taxable.

Where can you go to learn more about why Minnesota does not require sales tax on Downloadable Custom Software?

Minn. R. 8130.9910(2) identifies custom software as tax-exempt.

 

Mississippi

Does Mississippi require sales tax on Downloadable Custom Software?

Mississippi requires sales tax on downloadable custom software.

Why does Mississippi require sales tax on Downloadable Custom Software?

Software, whether it is custom or canned, delivered electronically or on tangible media, is taxable in Mississippi. A Computer Program is defined by Mississippi as “a series of instructions that are coded for acceptance or use by a computer system which are designed to permit the computer system to process data and provide results and information”. Mississippi defines computer software as “a collection of computer programs which work in cooperation with one another to perform automated tasks.”

Where can you go to learn more about why Mississippi requires sales tax on Downloadable Custom Software?

Miss. Rule 35.IV.5.06 (see page 55) defines computer software and programs and specifies that it is taxable regardless of how it is delivered to the customer. 

 

Missouri

Does Missouri require sales tax on Downloadable Custom Software?

Missouri does not require sales tax on downloadable custom software.

Why does Missouri not require sales tax on Downloadable Custom Software?

Missouri defines customized software as that which is developed to the special order of a customer. Missouri states, “the true object sought by a purchaser of customized software is the service of the seller and not the property produced by the service.” The state also advises that tax does not apply to the amount charged to the customer for custom software, but the purchase of any tangible personal property or taxable services used to provide the nontaxable service is subject to sales tax.

Where can you go to learn more about why Missouri does not require sales tax on Downloadable Custom Software?

Missouri 12 CSR 10-109 discusses the taxation of software, including custom software and related maintenance, services, and tangible personal property.

Nebraska

Does Nebraska require sales tax on Downloadable Custom Software?

Nebraska requires sales tax on downloadable custom software.

Why does Nebraska require sales tax on Downloadable Custom Software?

Nebraska states that “gross receipts from furnishing software regardless of the manner in which it is conveyed are taxable.” Interestingly, customer training, implementation fees, and consultant fees (related to software implementation) are also taxable if provided by the retailer of the software. Charges for consultants who only provide generalized advice and who do not provide any software or modifications to software are exempt. Nebraska defines computer software as “a sequence of instructions which directs the computer to process data”.

Where can you go to learn more about why Nebraska requires sales tax on Downloadable Custom Software?

Reg-1-088 specifies that gross receipts from furnishing software are taxable.

 

Nevada

Does Nevada require sales tax on Downloadable Custom Software?
Nevada does not require sales tax on downloadable custom software.

Why does Nevada not require sales tax on Downloadable Custom Software?

Nevada considers custom software a professional service and therefore it is not subject to sales tax. Nevada specifies that the tax does not apply to “the sale, lease, rental or licensing for use of custom computer software, regardless of the form in which the custom computer software is transferred.” Nevada also specifies that updates, upgrades, or service charges related to the custom software are not subject to sales tax. Please note that Nevada requires that charges for custom software (and any charges for updates, upgrades, or service fees) be separately stated on the invoice and not bundled with other taxable transactions. If non-taxable custom software is bundled with taxable transactions on the invoice, then it will be subject to sales tax.

Where can you go to learn more about why Nevada does not require sales tax on Downloadable Custom Software?

Nev. Admin. Code §372.875(2) specifies that custom computer software is defined as a professional service and therefore not subject to sales tax.

 

New Jersey

Does New Jersey require sales tax on Downloadable Custom Software?

New Jersey does not require sales tax on downloadable custom software.

Why does New Jersey not require sales tax on Downloadable Custom Software?

New Jersey does not require sales tax on custom software and states, “In those exceptional circumstances when software is created, written, and designed for the exclusive use of a specific customer, it is not considered pre-written computer software when sold to the specific customer for whom it was designed.” You should also note that New Jersey later uses the words “entirely custom” which indicates that modifications to prewritten software would not necessarily make the software fall under the definition of “custom software”. Instead, custom computer software would be treated as non-taxable professional services.

Where can you go to learn more about why New Jersey does not require sales tax on Downloadable Custom Software?

New Jersey’s Technical Bulletin – 51 provides insight on what software is and is not subject to sales tax.

 

New Mexico

Does New Mexico require sales tax on Downloadable Custom Software?

New Mexico requires sales tax on downloadable custom software.

Why does New Mexico require sales tax on Downloadable Custom Software?

Custom software in New Mexico is generally taxable as a taxable professional service under New Mexico’s gross receipts tax. New Mexico further clarifies certain software is considered property in New Mexico and consumers may be subject to property tax. Crazy, right? Custom software that is customized for the company only and is subject to an exclusive license and greatly modified, is exempt from property taxation.

Where can you go to learn more about why New Mexico requires sales tax on Downloadable Custom Software?

N.M. Admin. Code tit. 3, §3.2.1.18 section DD specifies that custom software is taxable in New Mexico. This page published by the New Mexico Department of Revenue summarizes which software is considered property for property tax considerations.

New York

Does New York require sales tax on Downloadable Custom Software?
New York does not require sales tax on downloadable custom software.

Why does New York not require sales tax on Downloadable Custom Software?
New York requires sales tax on prewritten software; however, sales tax does not apply if the software was custom-built for the customer. Software that was originally designed and developed to the specifications of a specific purchaser (custom software) loses its identity as such and becomes prewritten software subject to tax when it is sold to someone other than the person for whom it was originally designed. When prewritten software is modified or enhanced, it remains prewritten software. However, reasonable and separately stated charges for the modifications and enhancements are exempt.

Where can you go to learn more about why New York does not require sales tax on Downloadable Custom Software?

Sec. 1101(b)(14), Tax Law defines what is and isn’t considered prewritten (taxable) computer software in New York. This technical bulletin published by New York further clarifies what is and isn’t considered taxable software in New York.

 

North Carolina

Does North Carolina require sales tax on Downloadable Custom Software?

North Carolina does not require sales tax on downloadable custom software.

Why does North Carolina not require sales tax on Downloadable Custom Software?

North Carolina defines prewritten software as “Computer software, including prewritten upgrades, that is not designed and developed by the author or another creator to the specifications of a specific purchaser. The term includes software designed and developed by the author or another creator to the specifications of a specific purchaser when it is sold to a person other than the specific purchaser”. North Carolina has included custom computer software in its list of products that are exempt from sales tax.

Where can you go to learn more about why North Carolina does not require sales tax on Downloadable Custom Software?

N.C. G.S. 105-164.13(43) defines custom computer software and lists it as exempt from sales tax.

 

North Dakota

Does North Dakota require sales tax on Downloadable Custom Software?

North Dakota does not require sales tax on downloadable custom software.

Why does North Dakota not require sales tax on Downloadable Custom Software?

North Dakota does not require sales tax on custom software. North Dakota has provided official guidance through their Streamlined Sales Tax taxability matrix that custom software is exempt from sales tax. North Dakota taxes prewritten software, and as long as your custom software does not fall under the definition of prewritten software, then it is not taxable. Prewritten software is defined by North Dakota as “… computer software, including prewritten upgrades, which is not designed and developed by the author or other creator to the specifications of a specific purchase”.

Where can you go to learn more about why North Dakota does not require sales tax on Downloadable Custom Software?

NDCC 57-39.2-02.1(1)(g) specifies what constitutes taxable prewritten software (see page 6). North Dakota’s Streamlined Sales Tax Taxability Matrix clarifies that custom software is not subject to sales tax.

 

Ohio

Does Ohio require sales tax on Downloadable Custom Software?
Ohio requires sales tax on downloadable custom software intended for business use, but not on custom software created for non-business use.

Why does Ohio require sales tax on Downloadable Custom Software for business use and not for personal use?

Ohio requires sales tax on “computer services” that are for use in business. Many activities fall under Ohio’s definition of “computer services”, however, Ohio defines computer programming as a computer service which is “the service of writing, changing, debugging, or installing systems software” and defines systems software as “… all programming that controls the basic operations of the computer, such as arithmetic, logic, compilation or similar functions, whether it is an integral part of the computer hardware or is contained on magnetic disks or other storage media”. For this reason, custom software (a computer programming service) that is used for business is subject to sales tax. If you perform any other computer services for use by businesses, you need to pay special attention to if it is taxable in Ohio.

Where can you go to learn more about why Ohio requires sales tax on Downloadable Custom Software for business use and not for personal use?

Ohio AC5703-9-46 defines computer services, computer programming, and what is considered a business function. Ohio RC5739.01 defines what is considered a computer service and automatic data processing. 

 

Oklahoma

Does Oklahoma require sales tax on Downloadable Custom Software?

Oklahoma does not require sales tax on downloadable custom software.

Why does Oklahoma not require sales tax on Downloadable Custom Software?

Oklahoma states that custom computer software “means a program prepared to the special order of a customer. The sale of a custom computer program is a service transaction, and therefore, is not subject to tax. In addition, charges for maintenance are not taxable.” So if you sell custom computer software in Oklahoma, you’re good to go!

Where can you go to learn more about why Oklahoma does not require sales tax on Downloadable Custom Software?
Chapter 65. Sales and Use Tax (see page 168) defines custom computer software.

 

Pennsylvania

Does Pennsylvania require sales tax on Downloadable Custom Software?

Pennsylvania does not require sales tax on downloadable custom software.

Why does Pennsylvania not require sales tax on Downloadable Custom Software?

Pennsylvania does not require sales tax on “custom software” and defines custom software as “computer software designed, created and developed for and to the specifications of an original purchaser.” Pay special attention to the word “original purchaser” which Pennsylvania further defines as “the first person for whom the custom software was designed, created and developed, and to whom it was transferred in a sale at retail”.

Where can you go to learn more about why Pennsylvania does not require sales tax on Downloadable Custom Software?

Penn. Code § 60.19. Computer software, hardware, and related transactions defines custom computer software and specifies that it is not subject to sales and use tax.

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Rhode Island

Does Rhode Island require sales tax on Downloadable Custom Software?

Rhode Island does not require sales tax on downloadable custom software.

Why does Rhode Island not require sales tax on Downloadable Custom Software?

Rhode Island states that “custom software … is not subject to tax. This includes any services incidental hereto and any modifications.” Rhode Island defines custom software as “a program created specifically for one user and prepared to the special order of that user.” If the custom software is later sold to anyone else besides the original purchaser, it is not considered custom software and is therefore subject to sales tax.

Where can you go to learn more about why Rhode Island does not require sales tax on Downloadable Custom Software?

Sales and Use Tax Regulation SU 11-25 Computers, Software, and Related Systems defines custom computer software and specifies that it is not subject to sales tax (see page 2 and 4).

 

South Carolina

Does South Carolina require sales tax on Downloadable Custom Software?

South Carolina does not require sales tax on downloadable custom software.

Why does South Carolina not require sales tax on Downloadable Custom Software?

South Carolina does not require sales tax on custom software if it is delivered via electronic means because it is not considered tangible personal property. You must pay special attention to whether or not your software falls under South Carolina’s category of “communications” which may be subject to sales tax. Examples of taxable communication services include “Database Access Transmission Services or On-Line Information Services, including, but not limited to, legal research services, credit reporting/research services, and charges to access an individual website (including Application Service Providers).”

Where can you go to learn more about why South Carolina does not require sales tax on Downloadable Custom Software?

South Carolina Revenue Ruling 03-5 clarifies what is and is not considered taxable software with references to state statutes. Code Section 12-36-60 defines tangible personal property (which includes tangible personal property and communications).

 

South Dakota

Does South Dakota require sales tax on Downloadable Custom Software?

South Dakota requires sales tax on downloadable custom software.

Why does South Dakota require sales tax on Downloadable Custom Software?

South Dakota requires sales tax on custom computer software because anything delivered electronically falls under their definition of tangible personal property. Computer services, including programming services, also fall under the definition of a taxable service.

Where can you go to learn more about why South Dakota requires sales tax on Downloadable Custom Software?

Sec. 10-45-1(14), SDCL specifies that “any product delivered electronically” is subject to gross receipts (sales) tax. South Dakota’s Streamlined Sales Tax Taxability Matrix also provides clarity that custom software is subject to sales tax.

 

Tennessee

Does Tennessee require sales tax on Downloadable Custom Software?

Tennessee requires sales tax on downloadable custom software.

Why does Tennessee require sales tax on Downloadable Custom Software?
Tennessee requires sales tax on custom software, regardless of if it is delivered electronically, on tangible storage media (like a CD-Rom), loaded or programmed into a computer, or created on the premises of the consumer. Sales tax would also be due on any repairs, upgrades, or updates if there is an additional charge. 

Where can you go to learn more about why Tennessee requires sales tax on Downloadable Custom Software?
Sec. 67-6-231(a) specifies that sales tax applies to custom software in Tennessee. 67-6-102 (H) (ii) (k) specifies that an exemption might apply in Tennessee for certain manufacturing-related software.

 

Texas

Does Texas require sales tax on Downloadable Custom Software?

Texas does not require sales tax on downloadable custom software.

Why does Texas not require sales tax on Downloadable Custom Software?

Texas will default to requiring sales tax on custom software unless it can be shown that exclusive rights to the software were transferred to the customer. If exclusive rights to use the software were transferred to the customer, then the sale is for a nontaxable service. During audits, Texas has been known to investigate the contracts between the software developers and the customer to determine if the license was exclusive and transferable. The custom software must also be created from scratch and not be comprised of pre-built code in order to be categorized as an exempt service.

Where can you go to learn more about why Texas does not require sales tax on Downloadable Custom Software?
Section 151.009 specifies that a “computer program” is part of the definition of taxable tangible personal property. Texas Hearing No. 103,863 specifies that if exclusive rights are transferred to the customer, then the custom software is considered a non-taxable service. Texas Hearing No. 32,495 specifies the software must be created from scratch for the exemption to apply. 

 

Utah

Does Utah require sales tax on Downloadable Custom Software?

Utah does not require sales tax on downloadable custom software.

Why does Utah not require sales tax on Downloadable Custom Software?

Utah does not require sales or use tax on custom software as it fits under the definition of a personal service. More specifically, Utah states that, “The sale, rental or lease of custom computer software constitutes a sale of personal services and is exempt from the sales or use tax, regardless of the form in which the software is purchased or transferred. Charges for services such as software maintenance, consultation in connection with a sale or lease, enhancements, or upgrading of custom software are not taxable.” 

Where can you go to learn more about why Utah does not require sales tax on Downloadable Custom Software?
R865-19S-92 specifies that Utah does not require sales tax on custom software. Utah released Pub 64 Sales Tax Information for Computer Service Providers to provide more details on how sales tax applies to computer software. 

 

Virginia

Does Virginia require sales tax on Downloadable Custom Software?

Virginia does not require sales tax on downloadable custom software.

Why does Virginia not require sales tax on Downloadable Custom Software?
Virginia does not require sales tax on custom computer software, referred to as “custom programs”. Virginia defines custom programs as “a computer program that is specifically designed and developed only for one customer.” Combining two or more prewritten programs together does not constitute a custom computer program. A prewritten program that is modified to any degree remains a prewritten program and does not become custom.

Where can you go to learn more about why Virginia does not require sales tax on Downloadable Custom Software?

Virginia states that “custom programs” are not subject to sales tax in 58.1-609.5. Service exemptions. Virginia provides a definition of custom programs in 58.1-602. Definitions.

 

Vermont

Does Vermont require sales tax on Downloadable Custom Software?
Vermont does not require sales tax on downloadable custom software.

Why does Vermont not require sales tax on Downloadable Custom Software?

Vermont does not require sales tax on custom software because it is considered a professional service, and professional services are exempt from sales tax in Vermont. 

Where can you go to learn more about why Vermont does not require sales tax on Downloadable Custom Software?
Vermont specifies that sales tax is not due on professional services in 32 V.S.A. Section 9701(6). Vermont Ruling 91-03 clarifies that custom software is considered a professional service. 

 

Washington

Does Washington require sales tax on Downloadable Custom Software?
Washington does not require sales tax on downloadable custom software.

Why does Washington not require sales tax on Downloadable Custom Software?

Washington does not require sales tax on custom software and defines custom software as “…computer software that is specially designed for a single person or a small group of persons’ specific needs. (4) ‘Person’ means any individual, receiver, administrator, executor, assignee, trustee in bankruptcy, trust, estate, firm, copartnership, joint venture, club, company, joint stock company, business trust, municipal corporation, political subdivision of the state of Washington, corporation, association, society, or any group of individuals acting as a unit, whether mutual, cooperative, fraternal, nonprofit, or otherwise and the United States or any instrumentality thereof.” 

Custom software is also not subject to Washington’s B&O tax. Custom software includes modifications to canned software and can be developed in-house by the user, by outside developers, or by both. Washington has also specified that combining two or more prewritten pieces of software together is not considered custom software. Washington also specifies that customization of prewritten software is not subject to sales tax. 

Where can you go to learn more about why Washington does not require sales tax on Downloadable Custom Software?
Washington specifies that “custom software” does not fall under the definition of taxable tangible personal property in Wash. Rev. Code §82.04.050(6). Washington defines custom software in WAC 458-12-251. Washington specifies that custom software is not subject to B&O tax in WAC 458-20-15502.

 

West Virginia

Does West Virginia require sales tax on Downloadable Custom Software?
West Virginia requires sales tax on downloadable custom software.

Why does West Virginia require sales tax on Downloadable Custom Software?
West Virginia requires sales tax on custom software regardless of how it is delivered (via download or tangible media). West Virginia also requires sales tax on prewritten software and Software-as-a-Service. There is a very limited sales tax exemption provided by WV State Code § 11-15-9n  if the computer software is installed into a “qualified, new or expanded warehouse or distribution facility,” and meets very specific requirements.

Where can you go to learn more about why West Virginia requires sales tax on Downloadable Custom Software?
West Virginia defines computer software in WV State Code § 11-15B-2(b)(11). West Virginia indicated that sales tax is due on custom software in their Streamlined Taxability Matrix.

 

Wisconsin

Does Wisconsin require sales tax on Downloadable Custom Software?

Wisconsin does not require sales tax on downloadable custom software.

Why does Wisconsin not require sales tax on Downloadable Custom Software?

Wisconsin does not require sales tax on custom computer software. Although Wisconsin has not created an explicit definition of custom computer software or an explicit exemption, they have defined what is considered taxable prewritten software. If your custom software does not fall under the definition of what is taxable, then your custom software should not be subject to sales tax. In general, if you are creating software for a specific party and it is custom-coded for them, then it is not considered prewritten software and would therefore not subject to sales tax. Beware that if you re-sell the custom software to another party, or combine multiple pieces of custom software together, then it could be considered prewritten software. 

Where can you go to learn more about why Wisconsin does not require sales tax on Downloadable Custom Software?

Wisconsin defines tangible personal property (which includes prewritten software) in Wis. Stat. §77.51(20). Wisconsin defines prewritten computer software on this page. If your custom software does not fit within the definition of prewritten software then it should not be taxable. 

 

Wyoming

Does Wyoming require sales tax on Downloadable Custom Software?
Wyoming does not require sales tax on downloadable custom software.

Why does Wyoming not require sales tax on Downloadable Custom Software?
Wyoming does not require sales tax on custom software regardless of how it is delivered. Wyoming has created a specific exemption for custom software and states that, “The service of creating custom software for a person shall not be subject to the sales tax. The person performing the service shall be considered the consumer of all tangible personal property or services purchased to perform the service.” 

Generally, if custom software is re-sold to a customer different than who originally commissioned it, then it will be subject to sales tax. Typically, the combining of multiple pieces of software is not considered custom software. 

Where can you go to learn more about why Wyoming does not require sales tax on Downloadable Custom Software?
Wyoming states that custom software is not taxable in Wyo. BOE Rule Ch. 2, §13 (see Chapter 2).

Disclaimer: Our attorney wanted you to know that no financial, tax, legal advice or opinion is given through this post. All information provided is general in nature and may not apply to your specific situation and is intended for informational and educational purposes only. Information is provided “as is” and without warranty.

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