In the current market, it is rare for a software designer to create software solely for one specific
purchaser. Most software is instead already prewritten, and can be sold as is, or with some
modifications to adapt it to the customer’s special technical or business needs. In those
exceptional circumstances when software is created, written, and designed for the exclusive use
of a specific customer, it is not considered prewritten computer software when sold to the
specific customer for whom it was designed. N.J.S.A. 54:32B-8.56. That customer’s purchase of
this entirely custom-made software is treated as a nontaxable professional service transaction
and is not subject to Sales Tax.
MODIFIED SOFTWARE
It has become commonplace for business customers to purchase prewritten computer software
that has been modified somewhat to fit their technical or business requirements. The sale of
prewritten computer software is taxable regardless of whether the prewritten software is sold in
its original form, or combined with other prewritten software programs, or with modifications to
meet the purchaser’s special needs. However, the seller of modified software has an option to
charge a separate fee for the customization service. A separately stated, commercially
reasonable charge for the professional service of modifying the software for the customer is not
treated as a charge for the sale of prewritten computer software and is therefore exempt from
Sales Tax. N.J.S.A. 54:32B-8.56. If the seller of modified software instead chooses to charge a
lump sum, without separately stating the fee for customization services, then the entire charge is
subject to Sales Tax as part of the sale of tangible prewritten software.
EXEMPTION FOR SALES OF ELECTRONICALLY DELIVERED SOFTWARE USED EXCLUSIVELY
AND DIRECTLY IN CONDUCT OF PURCHASER’S BUSINESS, TRADE, OR OCCUPATION
There is one exception to the taxability of prewritten software delivered electronically. Sales of
prewritten software delivered electronically are exempt if the software is to be used directly and
exclusively in the conduct of the purchaser’s business, trade, or occupation. N.J.S.A. 54:32B-8.56.
This exception does not apply, however, if the software is being delivered by a “load-and-leave”
method. Sellers sometimes send a service representative to a customer’s New Jersey location to
install prewritten or modified software. In some circumstances, once the installation is complete,
the tangible storage medium (CD, disc) is not left with the customer. This type of installation is
referred to as “load and leave.” The transaction is not deemed to be the sale of tangible
personal property delivered electronically, and therefore is not exempt, even if the software is to
be used directly and exclusively in the conduct of the purchaser’s business, trade, or occupation.
If the purchaser of software initially delivered electronically also receives tangible storage media
containing the software, then the transaction is not deemed to be a sale of software delivered
electronically and is not exempt, even when the software is to be used directly and exclusively in
the purchaser’s business.
INSTALLATION AND MAINTENANCE SERVICES AND SERVICE CONTRACTS
Fees for the service of installing software for the customer are subject to Sales Tax. They are
treated as charges for the installation of tangible personal property. N.J.S.A. 54:32B-3(b)(2).
The sale of a maintenance contract for prewritten software is generally subject to tax.