New Jersey Rules That Software as a Service Is Not Taxable

Jul 3rd, 2012

The New Jersey Department of Treasury's Division of Taxation recently ruled that software as a service (often referred to by the acronym "SaaS") is not subject to sales tax. N.J. Ltr. Rul. LR: 2012-4-SUT (Div. of Taxn. June 22, 2012).

The taxpayer that requested the ruling charges its customers a monthly fee in exchange for use of a web application hosted on the Taxpayer's computer systems. This web application was developed for many users and not to the specifications of a single client. The Division stated that it understood the following basic facts about the typical software as a service scenario:

  • The seller fully owns and operates the software applications.
  • The seller owns, operates, and maintains the server that hosts the software.
  • Customers access the software via the Internet.
  • The software is not transferred to the customer, and the customer does not have the right to download, copy, or modify the software.

The Division explained that web-hosted services in which software is only accessed by the user, but not delivered or transferred to the user, are not subject to New Jersey's sales and use tax. Accordingly, the Division ruled that the taxpayer's charges for software as a service are not taxable provided that the software is only accessed by the user and there is no transfer or delivery of the software to the user.