Dougal Campbell's geek ramblings

WordPress, web development, and world domination.

Software taxes

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.

About Dougal Campbell

Dougal is a web developer, and a "Developer Emeritus" for the WordPress platform. When he's not coding PHP, Perl, CSS, JavaScript, or whatnot, he spends time with his wife, three children, a dog, and a cat in their Atlanta area home.
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18 Responses to Software taxes

  1. Craig says:

    Here in Canada the taxation is simple…you pay tax on everything! LOL! Actually, it’s not quite THAT simple, but the federal gov’t made sure that there was no service versus product taxation issue by creating the Goods and Services Tax (GST) which is 7%. Here in British Columbia, most things have Provincial Sales Tax (PST) at 7% ANDGST for a total of 14% tax on a product or service. Ugh.

    Related to gas prices, this means that as gasoline goes up, both the feds and provincial gov’ts get more money without actually raising the tax rate. They are loving every penny of it, I can assure you.

  2. Craig says:

    Oh yeah, one other interest tax that we have is all around the bullshit on protecting music and movie rights. You pay a tax on blank cassettes, VHS tapes, DVDs and CDs which is given to the various big money – big influence corporate giants who control the various media. You could be buying a DVD to back up your accounting information or your photo collection, but you have to pay the “copyright tax” (my term) anyway. As I said, it’s a BIG steaming pile of moose candy!

  3. Geren says:

    Here in Maryland, you pay tax on software, just like any other “product.” About the only thing we don’t pay sales tax on here is unprepared grocery products, and service charges.

  4. I hear that in Sealand, you don’t pay tax on anything.

  5. Xial says:

    Here in Florida, those beans’re tax free, my friend.
    But yeah, buy that copy of GTA off the shelf, and you’ll be paying sales tax (7%) on that.

    Though Craig’s comment on gasoline makes me wonder if there’s a hidden tax in our gas costs here, or not.

  6. Bob R says:

    In Canada it’s not that simple – depends on what business your are in. In Ontario, If I custom write software for someone it’s not taxable by the province, so I charge 7% GST (country level tax). If I sell two copies of the same pirece of software it’s 7%+8% Ontario tax.

    Simple sort of. But if you sell donuts: It’s 8% Ontario tax + 7% GST if you sell one donut, but only 7% if you sell a package of six. But it’s 7+8 if you sell two packages of four.

    If you make and sell custom signs, it’s 7%+8% if you sell the sign and the buyer screws it on the wall. But it’s 8% if you screw it on the wall. The materials for signs are purchased exempt of the 8% tax, but in the above case, if I buy a sheet of plywood – cut it in half and and make two signs, then I do not pay the 8%, but charge 8% to the first customer (on the selling price) but not to the second, therfore I’m obligated to pay back the 8% I did not pay on half the sheet of plywood.

    It’s insane.

  7. Craig says:

    @Bob R

    It’s insane.

    Agreed 110%!

  8. Drama Queen says:

    @Bob R

    It’s insane.

    Agreed 120%

  9. Poohbah says:

    Dude, you’re ate up…

    A can of beans is food and isn’t taxible in most states. Services such as Lawncare ARE taxible in most states now. Problem is most of the jack asses running around simply aren’t legal or legit and don’t collect the tax and turn it it.

    Most companies charge sales tax, and the EULA not withstanding you do usually own the media 😉 lol.

  10. Mark says:

    In Australia it’s almost the same as Canada, a 10% GST on everything, but no other taxes for most things. With all the rising software prices anyway it’s hardly noticable (plus when the GST came in they abolished some other taxes).

  11. Hal says:

    There may even be an argument for turning the tax burden back around onto the producer, not the consumer.

    You might not know it Dougal, but you have bought into a myth. Companies don’t pay taxes. They pass them on to the consumer. If a software maker all of a sudden has to pay more taxes, you better believe that your end user price will increase as well.

    BTW in Georgia, we do pay tax on groceries AND gas ($0.15/gal, not a floating pergentage thankfully).

    Regarding everyone else saying how confusing tax laws are, it can be done better. For those if you in the US, you should check out The Fairtax ( (The rest of you should see if something like this would make sense in your country.) The best part is that it IS simple. No income, medicare, social security, estate, gift or capital gains taxes. The only tax is at the retail level. This would apply to everything from a pear to custom software to sign hanging. No hidden taxes during the production or wholesale process, no forms to fill out, no guilty-until-proven-innocent IRS audits.

    One cool side-effect is that this turns the grey and black market economy into taxpayers. Illegal aliens have to buy food, housing and cars just like everyone else!

    Anyway I could go on and on. I’m a big fan of the plan.

  12. longtex says:

    …”turning the tax burden back around onto the producer, not the consumer”

    This is nonsense – it can’t be done.

    ALL expenses and costs of production are rolled into the price of goods and services.

  13. Bill says:

    Or you could just move to Oregon (or one of the other states with no sales tax…)

  14. jeff says:

    Great article. I wonder what the legal status of books checked out of libraries should be…..



  15. craig says:

    Complete nonsense. What a turn around…
    The tax on my apartment is bad enough.

  16. Jim says:

    EULAs are based on the myth that you need permission from the copyright holder in order to copy the software to install it. This is simply not true, at least in the USA.—-000-.html

  17. Steve Media says:

    I almost laughed as I read the quote in your post. But it actually makes sense. I would love to have it work out that way, but we can be sure that microsoft and other big businesses with lobbying will make sure that consumers are stuck with every burden out there, and the huge companies will pay less in taxes as we all make up for it.


  18. Michael says:

    The government wants to tax everything. Here in washington state they want you to charge sales tax on every product shipped to an address in the state. This is ridiculous considering sales tax is determined by zip code and there are over 200 different zip codes in the state. Talk about a pain the butt – I’m not selling a product rather a link to wholesale ipods or other wholesale electronics. Every time a product is shipped to a washington address I have to charge sales tax. This is where I can see an income tax benefiting me instead of a sales tax.

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