New Jersey Updates Rules for Software and Software Related Services

Friday, December 12th, 2014

 
 
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The New Jersey Division of Taxation adopted two new rules and amended a third to provide guidance on the taxability of software maintenance contracts, software-related services, and definitions applied to software.

Effective December 1, 2014, the old rule 18:24-25.6 (on maintenance contracts and software-related services) has been repealed and replaced with two new rules. One new rule addresses maintenance contracts, and the other addresses software-related services. Rule 18:24-25.1A (on software-related definitions) was also amended.

The definitions rule was amended to change the definitions that apply to software products and services. "Custom software" means software created, written, and designed for the exclusive use of one specific purchaser and the software was sold to that purchaser. "Custom software" code may include already existing development languages or prewritten functions. In other words, the software program as a whole needs to be unique, not its individual components. "Software maintenance contract" means a contract to provide future upgrades and/or updates to computer software and/or customer support services. Definitions for "customer support services," "installing," and "modifying" were also added.

New rule 18:24-25.6 provides sales tax guidance on software-related services. Prewritten computer software is considered tangible personal property and therefore taxable. Specifically listed services associated with this software are also taxable. These include general services, maintenance, and installation. However, modification of the software, customer support services, and services performed by the software are not taxable.

Rule 18:24-25.7 provides guidance on software maintenance contracts. In general, software maintenance contracts that only deliver prewritten updates are considered sales of prewritten software and are therefore taxable. It does not matter whether the updates are delivered electronically or in tangible form. However, if the software is used directly and exclusively in the purchaser's business or trade and the updates are delivered electronically, the contract is not taxable. In addition, software maintenance contracts that only provide customer support are not taxed because customer support is not a taxable service. If the contract provides both taxable and non-taxable services, the entire price of the contract is taxable unless (1) the taxable and non-taxable services are separately itemized or (2) the seller can demonstrate the portion of the contract that is for non-taxable products or services.

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