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Concern Over New Jersey Software Regulation

The New Jersey Division of Taxation is revisiting a proposed regulation that would provide new rules governing the sale of software and related services. While the draft regulation has not been formally published for public comment, t

October 20, 2010

The New Jersey Division of Taxation is revisiting a proposed regulation that would provide new rules governing the sale of software and related services. While the draft regulation has not been formally published for public comment, the Division is working with interested parties to accept comments prior to the draft’s publication.

The draft would amend existing definitions and add new definitions to N.J. Admin. Code §18:24-25.1, and replace the existing §18:24-25.6, entitled “Treatment of maintenance contracts and software-related services,” with new §18:24-25.6, entitled “Treatment of software-related services and software maintenance contracts.” These changes are significant because New Jersey taxes the enumerated services of installation and services to tangible personal property; but does not tax downloaded prewritten computer software when sold to a business user. New Jersey’s position is that these services are taxable, even when performed on electronically delivered, prewritten computer software.

Although New Jersey amended its definition of tangible personal property to include prewritten computer software on October 1, 2005, to conform to the Streamlined Sales and Use Tax Agreement (SSUTA), businesses presumed that because the State had also adopted a statutory exemption for prewritten computer software when sold to a business user, that all associated services (e.g., installation, configuration, and customization) would continue to be exempt. However, the Division’s policy is that because prewritten computer software is expressly included in the definition of tangible personal property, the Division can tax the services performed on the software, regardless of how it was delivered. Taxpayers who receive electronic delivery of software in New Jersey should evaluate the regulation’s implications for those purchases.

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