On Monday, April 21, the New Jersey Division of Taxation will release new regulatory guidance regarding the sales tax treatment of software and related services.
New Jersey imposes sales tax on the sale of tangible personal property and installing, maintaining, servicing, or repairing tangible personal property. In the wake of its adoption of the Streamlined Sales and Use Tax Agreement, New Jersey redefined tangible personal property to include canned software—even if delivered electronically. Although New Jersey exempts electronically delivered software used for business purposes, the exemption doesn’t apply to installation, maintenance, servicing, or repairs. So the Division has taken the position that services to software are taxable even if the underlying software is exempt.
The existing regulations provide relatively sparse guidance on distinguishing between taxable and nontaxable software-related services.
The new rules should help alleviate taxpayer confusion with a number of taxpayer-friendly definitions and examples. Some highlights include:
- Software can be considered nontaxable “custom software” even if it includes prewritten functions or routines.
- Taxable installation services are limited to loading executable files and do not include the mere act of electronic delivery.
- Taxable repairs and services to software are limited to maintaining compatibility and corrective services where the underlying code isn’t changed.
- Data entry is not considered to be a taxable service to software.
- If a taxpayer can show that a software maintenance contract includes nontaxable components, it won’t have to pay tax on that portion of the contract—even if the taxable and nontaxable items are not separately itemized.
The proposed regulation is intended to clarify existing policy, so taxpayers should apply the new regulation retroactively. Although no policy shift is intended, vendor and audit practices vary. So taxpayers should review any software-related purchases made within the last four years for potential refund opportunities.
Affected taxpayers who want to submit comments must do so by June 20.
If you are interested in more information on the new regulations or the sales tax treatment of software and related services generally, please contact one of the authors of this alert, or the Reed Smith attorney with whom you normally work. For more information on Reed Smith’s New Jersey tax practice, visit www.reedsmith.com/njtax.
Client Alert 2014-119