This post been adopted from the Minnesota Department of Revenue’s fact sheet, Computer Software Sales Tax.

TABLE OF CONTENTS

Prewritten Computer Software
Custom Computer Software
Prewritten Computer Software with Modifications
Other Charges
Capital Equipment Refund Claims
Exemption Certificates
Sales to Nonprofit Organizations
Equipment Sales
Local Sales and Use Taxes
Maintenance Agreements

Prewritten Computer Software

The sale, lease or license to use a canned or prewritten computer software program is taxable. The software may be delivered to the customer by any means, including:

  • electronically
  • internet download
  • load and leave
  • discs
  • CD ROM
  • tape

All payments for prewritten computer software are taxable, including those billed on a periodic basis (i.e., weekly, monthly, yearly), or on a per use or per hit basis.

A multiple-use license for prewritten computer software is taxable.

Custom Computer Software

A custom computer software program is not taxable. A custom program is one that is prepared to the special order of the customer. It generally requires consultation and an analysis of the customer’s requirements. The program may be transferred in the form of written procedures or contained or recorded on tapes, discs, cards or another device. It also may include documentation or manuals designed to facilitate the use of the custom computer program.

It does not include:

  • a canned or prewritten computer program held or existing for general or repeated sale or lease, even if the prewritten or canned program was initially developed on a custom basis for in-house use,
  • CD’s, disks, or other items developed for the purpose of training, speaker support, sales aides, etc., even when designed for a particular customer.

The vendor of the custom computer software program must pay sales or use tax on the cost of all materials used to produce the custom software.

Prewritten Computer Software with Modifications

A prewritten computer software program that is modified to meet one specific customer’s needs is a custom software program only to the extent of the modifications. The price for the prewritten program is taxable. The price for modifying or adapting the program is not taxable if separately stated on the bill.

Other Charges

Installation

Installation or set up of a computer system, or installation of hardware or prewritten software upgrades, is taxable. This is true when the installation charges are billed by the seller of the system and when billed by a third party hired only to do the installation. Amounts paid to reimburse the expenses of the installer for travel, lodging, meals, etc., are part of the installation charge and are also taxable.

Reinstallation

Reinstallation charges are not taxable. For example, if a system crashes and software has to be reinstalled, no tax applies to the charge for reinstallation. Tax is only due on the initial installation of an item.

Delivery

Delivery charges for taxable products, such as computer hardware or prewritten software, are taxable. Delivery charges include charges such as shipping, postage, handling, crating and packing. Delivery charges for nontaxable products or services are not taxable. See Fact Sheet 155, Delivery Charges, for more information.

Free Software

Installation or delivery charges for free software are taxable. Since installation and delivery charges are included in the definition of sales price, these charges become the sales price of the free software and are taxable.

Physically Converting Data

Converting data from one physical form to another is taxable. For example, converting a floppy disk to CD, tape, or paper report is taxable.

Electronically Converting Data

Converting data from one electronic format to another is not taxable. For example, converting electronic data in order to run the data on a new computer system is not taxable.

Compressing or Zipping

Compressing or zipping files is not taxable.

Charges to access data from a database at a remote location are not taxable.

Training

Training services are not taxable. If training materials, such as books, videos, or discs, are furnished with training services, the service provider must pay sales or use tax on the cost of the materials. If a separate amount is charged for the materials, the service provider should buy the materials exempt for resale and charge tax to the customer.

Disaster Recovery

Disaster recovery services are not taxable. Disaster recovery services are charges for maintaining copies of computer files and databases at a remote site for use in the event of a disaster. The service provider must pay sales or use tax on the cost of all taxable items used to provide the service.

Capital Equipment Refund Claims

Computers and software purchased for use in a production process may qualify as capital equipment that is eligible for a refund of state and local sales or use tax. To qualify, the computers or software must be used primarily for manufacturing, fabricating, mining, or refining a product to be sold ultimately at retail, or for electronically transmitting results retrieved by a customer from an online computerized data retrieval system. See Fact Sheet 103, Capital Equipment, for more information.

Exemption certificates

To buy items exempt from sales tax, the purchaser must give the seller a properly completed Form ST3, Certificate of Exemption, indicating the proper exemption code.

Multiple points of use (MPU)

Beginning July 1, 2013, a purchaser of digital products, computer software delivered electronically, or a taxable service may source the sale to multiple locations if the purchaser knows at the time of purchase that these items will be used concurrently in more than one taxing jurisdiction.

For purposes of this exemption, “concurrently available for use” means that employees or other agents of the buyer may use the digital products, computer software delivered electronically, or services simultaneously from one or more locations within this state and one or more locations outside this state. A digital code is concurrently available for use within and outside this state if employees or other agents of the buyer may use the digital products to be obtained by the code simultaneously at one or more locations within this state and one or more locations outside this state.

The purchaser must provide a fully completed ST3, indicating the MPU exemption. Purchaser is responsible for apportioning and remitting the tax due to each taxing jurisdiction. The apportionment method can be based on any reasonable method, as long as it is applied in a consistent and uniform manner, and the method can be justified through supporting records.

Sales to Nonprofit Organizations

Qualifying nonprofit organizations must give you a Form ST3, Certificate of Exemption, including their exempt status number (if they have one) to claim exemption.

Equipment Sales

If you sell equipment or other items that were used in your business, the sale may be subject to sales tax. See Fact Sheet 132, Occasional Sales of Business Equipment and Goods, for more information.

Local Sales and Use Taxes

If you are located or working in an area with a local tax, local sales or use tax may also be due. Local taxes are listed and explained in detail in Fact Sheet 164, Local Sales and Use Taxes.

Maintenance agreements

Prewritten Computer Software

If the maintenance agreement for a prewritten software program is required by the vendor as a condition of the sale, lease, or license to use the prewritten software, the price of the maintenance agreement is taxable.

If the maintenance agreement for prewritten software is optional, separately stated charges are taxed as follows:

Upgrades or Enhancements

Information and direc- tions, received in any format, that provide new or sig- nificantly improved function to a computer program are taxable. This includes information and directions that dictate the function performed by the computer. It also includes updated tables, such as employee with- holding tables, and postage rates.

Support services

Corrections received in any format, consultation services, or technical or telephone support for computer programs are not taxable.

Combination Charges

If there is only one charge for both upgrades or enhancements and support services, tax applies to 20% of the entire price of the optional maintenance agreement.

Custom software

A maintenance agreement for custom software is not taxable.

Equipment

Beginning July 1, 2013, maintenance contracts for elec- tronic and precision equipment (including computer equipment) where the repair service can be deducted as a business expense under the Internal Revenue Code are taxable. See Fact Sheet 152B, Labor – Repair for more information.

Prior to July 1, 2013, maintenance contracts for business equipment were treated the same as maintenance con- tracts for individuals. Effective July, 1, 2013, the following information only applies to individuals. Charges for optional extended warranties that cover future unexpected repair costs are not taxable when sold. The provider of the service must pay tax on their cost of taxable items used under the contract. Optional maintenance contracts for equipment that provide repair and replace- ment parts and consumable items at no additional cost are taxable.

A manufacturer’s warranty is included in the purchase price of the equipment. Repair or replacement parts covered by a manufacturer’s warranty are exchanges of inventory and are not taxable.

References

  • Minnesota Statutes section 297A.61, Subd. 17, Prewritten computer software
  • Minnesota Statutes section 297A.61, Subd. 17a, Delivered electronically
  • Minnesota Statutes section 297A.61, Subd. 17b, Load and leave
  • Minnesota Statutes section 297A.61, Subd. 3(f)
  • Minnesota Statutes section 297A.61, Subd. 4(c)
  • Minnesota Statutes section 297A.61, Subd. 10 (a)
  • Rule 8130.9910, Computer software
  • Revenue Notice # 02-15, Copies of Scanned Documents Revenue Notice # 12-12, Warranty and Maintenance Contracts – Optional Contracts on Equipment

Other fact sheets you may need:

Click here for more Minnesota Sales Tax Guides.

This post been adopted from the Minnesota Department of Revenue’s fact sheet, Computer Software Sales Tax.