This is consistent with the traditional common law concepts of tangible property in which the rights actually possessed are not the physical documentation but the "intangible" contractual rights and property rights represented by the documentation.
Historical background. Historically, the statutory distinction between "tangible" and "intangible" has been relatively easy to apply in the sales tax arena.
Advances in technology, however, have done much to blur this line between tangible and intangible property. Computer software ranks as perhaps the leading technology which defies easy classification. One problem is that the industry itself does not clearly define the term software, although the introductory material at the beginning of this outline can serve as a working definition for purposes of our discussion.
Moreover, information contained in "software" can be transmitted through several media. For example, the information can be delivered on a computer through disc, digital transmission over telephone lines, through direct input by an individual, through a magnetic tape transfer or, in some old fashioned cases, punched cards.
The law in this area became confused early in its development. Initially, taxpayers sought to characterize software as tangible personal property in order to claim an investment tax credit for expenditures on software for federal income tax purposes. The Internal Revenue Service, however, took the position that software is intangible property. As such, it could not be the subject of an investment tax credit. The courts which considered the issue for federal income tax purposes generally agreed with the Service, finding that the purchaser's main objective was to acquire knowledge or a process rather than tangible media, such as the software diskettes which sometimes carried the information.
Texas Instruments v. United States, F. Commissioner, 90 T. The courts noted that purchasers were often prohibited from copying or transferring a program and that once the program was placed on the computer, the tangible medium could be destroyed or returned to the vendor. Further, the courts analyzed the relative value of the information conveyed and the tangible medium which was used to convey it to conclude that what was purchased was the intangible embodied on the tape or diskette, not the physical embodiment.
At the same time the Service was arguing that computer software was intangible property which could not qualify for the investment tax credit, state revenue departments began to argue that software was tangible personal property subject to sales tax. In the early years, taxpayers contesting sales tax liability utilized federal precedent to argue successfully that software was not subject to sales tax because the intangible information, not the tangible media, was actually what was being sold.
First National Bank of Springfield v. Department of Revenue, 85 Ill. Tidwell, S. Central Computer Services, So. Univeral Computer Associates, Inc. As the technology developed and software was more frequently sold to the general public in shrink-wrapped packages, the courts began to view software as tangible personal property in a manner more analogous to books, records, photographs and video cassettes.
Comptroller of the Treasury v. Norberg, A. South Carolina Tax Commissioner, S. It should be noted that the statutory definition of tangible personal property in South Carolina is identical in all relevant respects to the Georgia's definition. The Court found the software under consideration was comparable to, rather than distinguishable from, books and movies, in which the information and the media are inseparable.
The taxpayer attempted to distinguish software from photographs, books and movies, in that software can be transmitted electronically without the use of tangible media, such as software diskettes. The court was unsympathetic in its response that despite the availability of electronic transfer without use of tangible media, where such tangible media was in fact used to deliver the software the taxpayers must report sales tax in accordance with the form of the transaction they chose.
One court has held that the arrangement of instructions on a tangible medium constitutes a "corporeal body", and hence, tangible property. South Cent. Bell Tel. Barthelemy, So. Software is not merely knowledge, but rather is knowledge recorded in a physical form which has physical existence, takes up space on the tape, disc, or hard drive, makes physical things happen, and can be perceived by the senses.
Of course, the peculiarities of Louisiana law may affect the applicability of this case in other jurisdictions. Another case found that computer software is ordinary common tangible property, at least where delivered on disks. Supply Corp. Rose, S. Computer software disks fall within the common, ordinary accepted meaning of the phrase "tangible goods, wares, or merchandises" found in the state statute.
The disks possess physical form, are capable of being touched, seen, and possessed, and are real and substantial. The taxability of the disks does not depend upon the separateability of the software instructions from the disks]. Georgia courts have not yet specifically ruled on the taxability of computer software. Perhaps the most analogous decision is Turner Communications Corporation v. Chilivis, Ga. The court noted that there were actually three types of property involved: tangible medium, the intangible contents, and the limited right to use the encoded program on the tape.
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.
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Saint Eustatius. Saint Lucia. Saint Maarten. Services arising from or related to installing, maintaining, servicing, repairing, operating, upgrading, or enhancing specified digital products are also subject to tax.
Kansas — SaaS is non-taxable. SaaS is not explicitly covered in Kentucky code, so this was confirmed with a call to the Kentucky Department of Revenue. Always be extra cautious when choosing not to charge sales tax based on unofficial guidance. Louisiana — SaaS is taxable. Maine — SaaS is considered tangible personal property and is taxable. Maryland — SaaS is taxable in Maryland. Massachusetts — SaaS and cloud computing are taxable in Massachusetts.
Michigan — SaaS is non-taxable in Michigan. Minnesota — SaaS is non-taxable in Minnesota. Mississippi — SaaS is taxable in Mississippi. Missouri — SaaS is non-taxable in Missouri.
Nebraska — SaaS is non-taxable in Nebraska. Nevada — SaaS is non-taxable in Nevada. Ohio — SaaS is taxable for business use in Ohio and non-taxable for personal use. Oklahoma — SaaS is non-taxable in Oklahoma.
Pennsylvania — SaaS is taxable in Pennsylvania. South Carolina — SaaS is considered a taxable service in South Carolina, as are other charges to access a website. South Dakota — SaaS is considered a taxable service in South Dakota, as are other charges to access software.
Tennessee — SaaS is taxable in Tennessee. Texas — SaaS is considered part of a data processing service and thus taxable in Texas. Utah — SaaS is taxable in Utah. Vermont — SaaS is non-taxable in Vermont as of July 1, Virginia — SaaS is non-taxable in Virginia. Washington — SaaS is taxable in Washington since all software, delivered by whatever means, is considered taxable in the state. Data processing is a service performed with a computer using the customer's data.
Entering, storing, manipulating, or retrieving a customer's data is taxable. But merely using the computer as a tool to help perform a professional service is not taxable. We've prepared a partial list of taxable data processing services. This will give you an idea of the type of service that is taxable when performed using a computer.
If you provide a different service for a client, and are not sure if it's taxable, give us a call at the toll-free number listed on this bulletin. When you provide a professional service, such as engineering or bookkeeping, and use a computer as a tool to complete that service, your charges are not taxable.
For example, when you use a computer to prepare a federal income tax return, the charge to your client is not taxable because you are using your knowledge of accounting principles and tax laws to prepare the return.
Or when you use a computer to analyze faults in a structure, the service is not a data processing service. The computer is merely a tool you use to provide an engineering service. If your business includes both taxable services and nontaxable services, collect tax only on taxable services.
But the nontaxable service must be distinct and identifiable, and it must be a type of service that is commonly provided by itself without another service.
You must bill your customer separately for the taxable service, and this charge must be reasonable.
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