Custom Software Taxed in 11 States

On March 9th, the House approved a package of revenue enhancements needed to maintain core public services like health care and education.  The House package includes a measure that would broaden the sales tax to include purchases of customized software. Like many of the other tax increases proposed by state policymakers, this has already been done in other states; according to CCH Incorporated, 11 states and the District of Columbia currently levy sales taxes on custom software.

Under current law, sales of prewritten or “canned” software are subject to the state sales tax while sales of custom software are exempt.  Prewritten software includes typical off-the-shelf products such as Microsoft Office, Windows, video games, and other mass marketed consumer software products.  Custom software is not mass marketed or sold in retail stores.  In its purest form, custom software is developed from scratch for use by a single user or business. 

The current House proposal would extend the sales tax to custom software and to prewritten software that has been heavily customized for a specific user.  If approved by the State Senate, this action would generate some $77 million in coming fiscal year and more than $180 million in the FY2011-13 biennium.

Based on the findings of a new analysis by the Center on Budget and Policy Priorities (CBPP), last week the Budget & Policy Center reported that many of the actions currently under consideration in Olympia have already been enacted in other states.  Of the 33 states that have enacted tax increases to maintain services during the current downturn, 11 have restricted business tax preferences; five have enacted business tax surcharges; nine have eliminated sales tax exemptions; and eight have increased the sales tax rate – all of which are currently under consideration in Washington State.  Click here to read our full summary.