Computer Software Taxation - Essay Example

As a preliminary matter, it must be noted that attempts to tax computer software have long been particularly troublesome. How a taxing authority decides to classify sales transactions involving computer software determines whether it will be subjected to sales/use tax or treated as exempt. It is here that, in attempting to classify computer software, a number of state authorities and judicial bodies have struggled to forge a uniform approach. Uniformity and consistency, to be certain, have proven elusive ideals.

This essay will examine the sales/use tax implications for transfers of computer software, particularly to the electronic delivery of computer software, in an effort to demonstrate how more consistency and uniformity might be brought to the issue. In order to understand how electronic delivery has become an interesting issue, however, it is first important to understand how and why the electronic delivery of computer software has become a viable option for avoiding the imposition of sales tax in some jurisdictions.

States began to implement sales/use tax schemes beginning in the 1930s in an effort to raise revenues (Morse, 1997). These taxes were levied on retail sales made within the states, they developed into a primary source of revenue for the states, and the mobility of the internet and computer software has since then made many states quite eager to apply their sales taxes to this burgeoning area of commerce. A sales tax is designed to impose an excise tax for retail transactions within a state whereas the use tax is designed to impose an excise tax for goods purchased outside of a state but subsequently used or maintained within the state.

The taxes in this way are complementary. That states became extraordinarily interested in imposing sales taxes on an emerging industry is hardly surprising. What is surprising, on the other hand, is the tremendous conflict generated by attempts to tax transactions involving computer software. Legislation and regulations were rushed through; frequent modifications were required because the implications of certain policies, both legally and economically, were not well-considered in advance.

In many respects, the relationship between sales taxes and sales of computer software has been messy at best, and nearly incomprehensible at times. In Ohio, a sales tax was enacted in 1934. As noted by a leading tax practitioner, When Ohio sales tax was first imposed, and for many years thereafter, the taxes applied to all sales of tangible personal property unless otherwise exempt. This prompted many disputes over the nature of the transaction: tangible personal property, real property or a service.

The latter two were not listed as potentially taxable sales. Historically, the exclusion from personal, professional and insurance services has been provided in R.C. 5739.01(B) (last para.). Judicial tests developed to help taxpayers make meaningful distinctions among the various types of transactions (tangible personal property vs. real property vs. services) for sales tax purposes (Ehler, 2007: 1). Nearly every state,