When shipping software where and when do you need to charge tax?
One of the questions we have whenever we ship our software to a new state is whether we need to charge sales tax. This get more complicated because some states charge tax on perpetual software but not on maintenance with time-based licenses somewhere in the middle.
We classify software by:
- Perpetual: customer licenses the software forever
- Time-based: customer licenses software for a specific period of time
- Maintenance: the maintenance fee for perpetual software
In addition, we make a distinction between physical delivery of software and electronic delivery because this has an impact on the tax status in California and New Jersey.
Given that, so far we have information on the following states (note this is regardless of the buyers tax-exempt status):
- California
- Perpetual and time-based licenses as well as maintenance are taxable if there is a physical delivery and non-taxable otherwise.
- Colorado
- Perpetual and time-based licenses are taxable but maintenance is not.
- Florida
- Perpetual and time-based licenses as well as maintenance are always taxable.
- Massachusetts
- Perpetual and time-based licenses as well as maintenance are always taxable.
- Maryland
- Perpetual and time-based licenses. Maintenance is not taxed (see comments below)
- New Jersey
- Perpetual and time-based licenses are non-taxable if delivered electronically otherwise taxable. Maintenance is always non-taxable
- New York
- Perpetual and time-based licenses as well as maintenance are always taxable.
- Pennsylvania
- Perpetual and time-based licenses as well as maintenance are always taxable.
- Texas
- Perpetual and time-based licenses as well as maintenance are always taxable.
- Washington
- Perpetual and time-based licenses as well as maintenance are always taxable.
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This document http://www.salestaxreference.com/master/other%20pages/Tax%20Research%20Analysis%20TRA%20-%20Florida.pdf indicated that Florida, like California, does not charge sales tax if the software is delivered electronically. – Dane 14 years ago
3 Answers
Where did you get your information for Maryland? I live in MD, and I was told by the state that sales tax does not apply to intangible things. So physical delivery of software is taxable, but electronic delivery is not.
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My information came from E&Y but it was from 2002 so it might be out of date. Looking at the MD website at http://business.marylandtaxes.com/pdf/Sales_Use_Tax_Facts_2008.pdf it does seem that they at least repealed the tax on maintenance and services. I'll keep looking and see if I can find a full reference. Thanks for catching this. – Dane 14 years ago
This question has been answered numerous times here. Basically, unless you have a physical prescence in the state you are shipping to you do not charge sales tax. See the US Supreme Court decision on Quill vs The State of North Dakota.
Quill vs The State of North Dakota If you are in Illinois, you only charge sales tax on sales to people who reside in Illinois. In addition, Illinois only charges sales tax on commercial/retail software (no matter how it is delivered). Custom software is not taxed.
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I don't disagree with that at all although what presence actually means is defined by each state. In WA if you visit customers there they consider that to have a presence in the state. In most states if you have a remote employee in the state then you have a presence in that state. As companies grow it is not uncommon to have a presence in many states. – Dane 14 years ago
Gary is right. You charge taxes only to customer on your state.
Things are different if you are using a payment processor like AvanGate, FastSpring, etc.
Since they are resellers of your software they charge taxes to customers that reside on their state not yours.
