The New Jersey Tax Court recently issued a decision concluding that pre-written software sold on tangible media was tangible personal property for New Jersey sales tax purposes. Notwithstanding this decision, most business purchases of software and related services are not subject to New Jersey sales tax.
On January 9, 2017, the New Jersey Tax Court reversed its prior decision in Premier Netcomm Solutions, L.L.C. and concluded that pre-written software sold on tangible media is treated as tangible personal property for sales and use tax purposes.1 Because it specifically addresses only transactions occurring before October 2005, the court’s decision will have limited relevance for most taxpayers. Still, the decision serves as an important reminder that most business purchases of software and related services are not taxable in New Jersey.
New Jersey’s current sales tax statute exempts electronically delivered software used exclusively in the conduct of the purchaser’s business. The exemption applies even if purchaser receives written manuals or training manuals. Although New Jersey imposes sales tax on charges for installing, repairing, servicing, and maintaining software, the Division of Taxation’s regulations define these services very narrowly. For example, taxable installation services are limited to “the act of loading an executable file … onto a device or equipment.”2 Any other services provided by the installer—such as modification or customization services—should be nontaxable. With respect to a company’s existing software applications, any services that enhance or improve that software should also be nontaxable.
This means that businesses should not be paying New Jersey sales tax on the vast majority of their purchases of software and software-related services.
In our experience, however, software vendors frequently charge New Jersey sales tax on services that are not taxable. Part of the problem is that the Division of Taxation is very conservative in the advice it gives vendors on their collection responsibilities. Similarly, the Division’s auditors routinely go beyond the scope of the regulations in assessing sales tax on software-related transactions.
As a result, if you paid tax on software or related services in New Jersey, you likely have a refund opportunity. A summary of the taxability of software-related purchases, as well as other New Jersey sales tax issues is available here.
Reed Smith’s State Tax practice has 14 lawyers licensed to practice in New Jersey. Our team also includes accountants and paralegals to handle New Jersey sales and use tax matters of all types, from audit defense and appeals, to contingent-fee refund reviews. Unlike typical consulting firms, Reed Smith’s team can handle your matter at all stages—including not only audit and administrative appeals, but also settlement negotiations at Tax Court and, if necessary, litigation. If you have questions about the taxability of software or related services in New Jersey, please contact one of the authors of this Alert or the Reed Smith attorney with whom you usually work.
About Reed Smith State Tax
Reed Smith’s state and local tax practice is composed of lawyers across seven offices nationwide. The practice focuses on state and local audit defense and refund appeals (from the administrative level through the appellate courts), as well as planning and transactional matters involving income, franchise, unclaimed property, sales and use, and property tax issues. Click here to view our State Tax team.
- For a copy of the court’s latest decision, please click here. A copy of the court’s prior decision, which was issued last October, is available here.
- N.J. Admin. Code 18:24-25.1A (“Installing”).
Client Alert 2017-011