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State and Local Tax

Taxation of Software and Services

Carlton Huntley, J.D., LL.M.  Tax & Accounting Editor, Checkpoint

Carlton Huntley, J.D., LL.M.  Tax & Accounting Editor, Checkpoint

Many companies provide to their customers some version of software or access to cloud-hosted software. Even companies that do not offer any software services or dashboard access may be involved in the purchase of software or software services. Software, and particularly cloud-based hosted solutions, does not fit comfortably into the customary sales and use tax tangible personal property versus service dichotomy. Application of sales tax to software has traditionally turned on whether the software is pre-canned or custom, roughly mapping to whether the software is a tangible product like most tangible personal property or an extension of personal services. However, the advent of the internet and electronic delivery has complicated this model. While most jurisdictions tax the transfer of software via a physical medium, only certain states and jurisdictions tax software that is delivered electronically.

Cloud-based hosted solutions add an additional wrinkle by granting remote access to software and digital services without the need to transfer software at all.  Currently, at least 16 states impose sales and use tax on the sale of cloud-based hosted solutions.

For multi-jurisdictional coverage of the taxation of electronically downloaded software and software as a service (SaaS), contact Thomson Reuters and ask about our newly designed State Tax Charts on Checkpoint Edge.

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