NJ Sales Tax - New Software Regulations to be Released Monday


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.

Written by:

Published In:


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Reed Smith | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »

All the intelligence you need, in one easy email:

Great! Your first step to building an email digest of JD Supra authors and topics. Log in with LinkedIn so we can start sending your digest...

Sign up for your custom alerts now, using LinkedIn ›

* With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name.