Note: The following is an excerpt from the introduction to the article as published in The State and Local Tax Lawyer. Author citations have been omitted for brevity.

Should Taxpayers Disregard States’ Guidance on Electronic Transfers of Prewritten Computer Software?
Ethan D. Millar*

About 30 states now purport to impose sales and use taxes on electronic transfers of prewritten computer software. Yet, many of these states lack explicit statutory authority to do so. Instead, they rely on their general statutory framework for imposing sales and use taxes. However, the general statutory framework adopted by most of these states does not necessarily permit a tax on such transfers. As a result, it is not clear whether these states are entitled to tax these transfers. In addition, many of the states that do not seek to tax electronic transfers of prewritten computer software do not have explicit statutory exemptions, often forcing taxpayers to rely on informal administrative guidance that such transfers are nontaxable. Taxpayers take considerable risks in relying on such guidance in states that have general statutory authority to tax prewritten computer software. Moreover, as illustrated by the recent decision by the Pennsylvania Commonwealth Court in Graham Packaging Company v. Commonwealth, which held that electronic transfers of computer software were taxable despite the state revenue department’s guidance to the contrary, taxpayers are also at risk even in states that lack such authority.

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Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center