Thu, May 24, 2007 10:58 EDT

Avoid Sales Tax on Software

Posted by: Patrick Chapman in Best Practices

Topic: Partner/Vendor Management

Current Rating: Comments: 3

Because some states treat software as intangible property, their laws do not require sales tax to be paid on software when the software is either electronically downloaded or transferred by e-mail and no physical property such as disks or manuals are provided.

Additionally, software is non-taxable in some states when the software is installed on-site and the installer leaves no physical discs or manuals behind (often referred to as 'Load and Leave').

To take advantage of this, remember to ensure that no physical property in the form of media or documents is transferred and your purchase order is worded accordingly. Don't count on vendors to mention this as an option.

One large organization in California was able to save more than $500K in sales tax in one year by insisting certain vendors adhere to the organization's load and leave terms.

Each state's laws vary on the applicability of sales tax on software with some states also differentiating between custom and off-the-shelf software as well as whether anything tangible was transferred. Check your states sales tax laws & consult a tax attorney to determine whether you can benefit.

About the Author: Patrick Chapman's experience includes a variety of business and technology functions, including strategy, finance, application development, and infrastructure planning.

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Thu, May 24, 2007 11:49 EDT

Sales Tax? Disaster Recovery?

Posted by: Romaccellion
Rating:

This is a rather amazing idea, and extremely helpful, but I'm rather suprised that this is being instituted corporate-wide as it is described. There are times where a computer may need to be able to very quickly and very effectively brought back to the same state it was in previously, and this means both software and hardware. If there are a number of systems without any form of media for reinstall which need to be rebuilt in a short amount of time, what sort of effect would this have on recovery of those systems? Would there be a long line of waiting orders to be handled by support staff, as they go from machine to machine, load it up, and move on to the next one for each program? How long would such a process take, and is it worth the risk to save such a sum?

Marty Kerby
Secure-24

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Thu, May 24, 2007 15:36 EDT

Avoid Sales Tax on Software

Posted by: Patrick Chapman
Rating:

Great question. The tax treatment applies to the transfer of physical property (disks, manuals, etc.) from the vendor to the organization. However nothing from a tax treatment perspective prevents the organization from making its own physical backup copies after it has taken title to the software images/installation executables or softcopy manuals.

And Great Point. Organization's should, consistent with best practices in infrastructure management and disaster recovery planning, ensure they have these files as part of the procurement and make appropriate back-ups of this software once they take possession.

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Fri, May 25, 2007 9:00 EDT

Avoid Sales Tax on Software

Posted by: Romaccellion
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That's a fair response. But I would definitely want to check the letter of the law before I made any sort of copy on the material for the sake of backup. There's a chance that making that backup material itself would cause either copyright infringement.

Of course, if you were careful and played it right, that would be a very effective way to handle things. I that at this point all I would need to do to satisfy my semi-paranoia about system failure would be to study the laws themselves pertaining to this issue. That's not as hard as it could be, considering how I felt about this when I first responded.

Marty Kerby
Secure-24

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