Taxability of Computer Software

Computer hardware is generally taxable, with certain exceptions for computers used in manufacturing, production, and research. Similar exceptions may exist for software that would otherwise be taxable. “Canned” (prewritten) software is also generally taxable. Many states distinguish between “canned” , which can be purchased off the shelf and used in a customer's computer without any modification, and “custom” software, which is generally a program created to meet a specific customer's needs. In some states, a canned program modified to meet a particular customer's needs qualifies as a nontaxable custom program. States that may provide exemptions for Custom software include: Alabama, Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachussets, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, North Dakota, Oklahoma, Pennsylvania, Rhode Island, Utah, Vermont, Virginia, Washington, Wisconsin and Wyoming. Contact a Sales & Use Tax professional for more information.