Pennsylvania Clarifies Sales Tax on Canned Software & Digital Services

After the Board of Appeals of the Department of Revenue published the ruling in the case concerning the taxable cloud computing and support services to canned computer software in September, the Department of Revenue (DOR) published comprehensive guidelines in October regarding the application of sales and use tax on canned computer software, digital goods, and related services.

Apart from provisions from the law, the guidelines include principles and examples of how the provisions apply.

Sales Tax Rules Under the Guidelines

The guidelines confirm what has previously been established by case law: canned computer software is tangible personal property. Furthermore, they clarify that the final price includes all costs and that vendors are not allowed to exclude labor or service costs from the final price of a sale of tangible personal property.

In addition, the guidelines underline that repairs, alterations, modifications, or cleanings of tangible personal property, as well as modifications or configurations of canned computer software, are taxable in Pennsylvania.

Contrary to this, the sale of customs software and support services related to custom software is not subject to sales tax, as the software is designed and developed based on the buyers' needs and specifications. 

To determine whether a particular transaction is taxable, the DOR will consider all its details and evaluate related invoices, contracts, statements of work, and other relevant documents that may provide more information on its nature.

Finally, the guidelines contain the list of services that may be provided as supported and explain when they are and are not taxable.

Conclusion

The guidelines published by the Pennsylvania Department of Revenue provide valuable information for vendors who supply canned software or who develop custom software for their clients. Therefore, those engaged in these supplies should study these guidelines and determine whether they may benefit from them or will face additional sales and use tax burdens.

Source: Deloitte, Department of Revenue, VATabout