While most tangible personal property has sales tax applied when money changes hands between a business and an end user, software sales are taxed or exempted based on less tangible factors.
The taxability of software is treated much differently from state to state. In fact, the type of software has a great deal to do with the final determination of its taxability. Some states tax software sold on CD and exempt software made available as a download. Other states make no such distinction. Many states base the taxability of software on whether it is off-the-shelf or has been customized for a user.
Below is a map, courtesy of the Tax Foundation, showing the different sales tax treatments of different types of software by state. Orange indicates taxable, blue indicates tax exempt. (1: triangle) pre-made “canned” software purchased in the form of tangible property like a disk or CD; (2: square) canned software downloaded directly onto a computer; (3: circle) custom software purchased on a disk or CD; (4: starburst) custom software downloaded; and (5: star) custom software customized by the user for their use. Lucinda
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