Dougal Campbell's geek ramblings

Most states charge sales tax for “products”, but not for “services”. So, if you go to the store and buy a can of beans, you are charged tax. If you hire a lawn service to cut your grass, you are not.

Due to the way that commercially sold computer software is typically licensed, most states didn’t charge sales tax on it. Until fairly recently, anyways. I vaguely remember grumbling about it about ten years ago when Alabama changed their tax codes to allow for sales tax on software. After all, according to the software publishers, you don’t “own” software, you only license the right to use it. This makes it closer to a service than a product. But, heck, it’s only a few percent, so it’s not worth raising a ruckus about, is it?

Well, maybe it is. Ed Foster digs deeper into the issue in his article about Paying Taxes on Software, and explains some pitfalls that most of us have never considered. In particular, the software license model affects how businesses handle their tax accounting. There may even be an argument for turning the tax burden back around onto the producer, not the consumer.

“If the software is licensed, then the originating company owns it and they can pay the property taxes on it,” wrote one reader. “I have to pay property tax on all the computer hardware and software used in my business virtually forever or until I declare it obsolete and no longer used. This is subject to audit by an agent of the county whose audit is accepted by the IRS as valid. If I rent a car as a business expense, the property taxes are paid by the owner, not me, except as incidental through my rental payments. It would serve these software developer thugs right to have to pay property tax on every sale they make to every end user in every state. If they refuse, then the software is automatically recognized as owned by the buyer, not leased.”

See also Ed’s article on how a typical EULA attempts to negate your right of First Sale. Granted, as pointed out by one of the commenters, the U.S. Code deals with First Sale exemptions for possession of copyrighted works “by rental, lease, loan, or otherwise, without acquiring ownership”. But the questions raised about whether or not the purchase price of software is eligible for depreciation calculations are still worth debate.

Also, consider that commercial media such as music and movies are treated similarly. You do not “own” your copy of “The Matrix”. Your purchase of the DVD just buys you the right to watch your licensed copy. This is one of the loopholes that the entertainment industry attempts to hang you with just because you want to copy MP3 versions of a CD onto your iPod.