​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​Taxability of Canned Computer Software, Digital Goods, and Related Services​​

I. Background​

Softw​are vendors often sell canned computer software directly to the consumer, which is delivered on tangible media, electronically, digitally, streamed, or accessed through a software-as-a-service agreement (SaaS). A vendor may offer services in conjunction with the sale of canned computer software, such ​as:

​​II. Statement of Law

​The Tax Reform Code of 1971 provides that a sale at retail includes:

Any transfer, for a consideration, of the ownership, custody or possession of tangible personal property, including the grant of a license to use or consume whether such transfer be absolute or conditional and by whatsoever means the same shall have been effected.

72 P.S. § 7201(k)(1). In addition, the definition includes:

The rendition for a consideration of the service of repairing, altering, mending, pressing, fitting, dyeing, laundering, drycleaning or cleaning tangible personal property other than wearing apparel or shoes, or applying or installing tangible personal property as a repair or replacement part of other tangible personal property except wearing apparel or shoes for a consideration, whether or not the services are performed directly or by any means other than by coin-operated self-service laundry equipment for wearing apparel or household goods and whether or not any tangible personal property is transferred in conjunction therewith, except such services as are rendered in the construction, reconstruction, remodeling, repair or maintenance of real estate: Provided, however, That this subclause shall not be deemed to impose tax upon such services in the preparation for sale of new items which are excluded from the tax under clause (26) of section 204, or upon diaper service.

72 P.S. § 7201(k)(4). The Tax Reform Code defines purchase price to include:

The total value of anything paid or delivered, or promised to be paid or delivered, whether it be money or otherwise, in complete performance of a sale at retail or purchase at retail as herein defined, without any deduction on account of the cost or value of the property sold, cost or value of transportation, cost or value of labor or service, interest or discount paid or allowed after the sale is consummated, any other taxes imposed by the Commonwealth of Pennsylvania or any other expense, except that there shall be excluded any gratuity or any separately stated deposit charge for returnable containers.

​72 ​P.S. §​ 720​​1(g)(1) (emphasis added). Further, the Tax Reform Code defines, use to ​be:

The exercise of any right or power incidental to the ownership, custody or possession of tangible personal property and shall include, but not be limited to transportation, storage or consumption.

72 P.S. § 7201(o)(1)

Act 84 of 2016 amended the Tax Reform Code to include the following in the definition of tangible personal property at 72 P.S. § 7201(m)(2)(i-x):

The term shall include the following, whether electronically or digitally delivered, streamed or accessed and whether purchased singly, by subscription or in any other manner, including maintenance and updates:

• video;
• photographs;
• books;
• any other otherwise taxable printed matter;
• applications, commonly known as apps;
• games;
• music;
• any other audio, including satellite radio service;
• canned software, notwithstanding the function performed, including support, except separately invoiced help desk or call center support; or
• any other otherwise taxable tangible personal property electronically or digitally delivered, streamed, or accessed.

Id. The Department of Revenue’s regulations state the following services performed on tangible personal property are taxable whether tangible personal property is transferred or not:

1. Repairing, altering, mending, pressing, fitting, dyeing, laundering, drycleaning or cleaning tangible personal property other than clothing or footwear. Effective July 1, 1971, charges for repairing, altering, mending, pressing, fitting, dyeing, laundering, drycleaning or cleaning clothing or footwear are exempt from tax. For example, if a bookcase is taken to a carpenter to have a defective shelf repaired, the charge for the repair is subject to tax. However, if a shoe is taken to a shoe repairperson to have a heel fixed, the charge for the repair is not subject to tax.
2. Applying or installing tangible personal property as a repair or replacement part of other tangible personal property. For example, if a garage employee replaces a tire on an automobile with a new one, the installation charge plus the price of the new tire is subject to tax. If the garage employee merely replaces the old tire with a spare belonging to the car owner, the installation charge is nevertheless subject to tax.
3. Labor or services billed by the vendor for delivering, installing or applying tangible personal property sold by the vendor even if the services are contracted for separately.  

61 Pa. Code § 31.5(a)​

III. Conclusion

Canned computer software, by definition and long-standing case law, is tangible personal property. 72 P.S. §7201(m); Dechert LLP v. Commonwealth, 998 A.2d 575 (Pa. 2010); Graham Packaging Company, LP v. Commonwealth, 882 A.2d 1076 (Pa. Cmwlth. 2005). The taxable portion of purchase price includes the total paid in complete performance of the sale at retail. A vendor is not allowed to exclude the cost of labor or service from the purchase price of a sale at retail of tangible personal property. 72 P.S. § 7201(k); 61 Pa. Code § 33.2. For example, if the labor or service is necessary for the tangible personal property to function as required, then it is included in the taxable purchase price as it is required to complete the sale at retail. See Downs Racing, LP v. Commonwealth, 196 A.3d 603 (Pa. 2018).

As the Tax Reform Code taxes repairing, altering, mending, pressing, fitting, dyeing, laundering, drycleaning or cleaning tangible personal property, any charges for modifying or configuring canned computer software is taxable as the alteration of tangible personal property regardless of whether such modification or configuration is performed in conjunction with the sale of canned computer software or not.

The sale of custom software and any related services to custom software is not subject to sales tax. Custom software is designed, created and developed for and to the specifications of an original purchaser. The original purchaser is the first person for whom the custom software was designed, created, and developed, and to whom it was transferred in a sale at retail.

​IV. Examples

The following are examples that apply the principles and concepts explained above. However, please note that they are examples. Each sale at retail must be evaluated to determine the taxable purchase price for each separately stated item. A sale at retail does not become taxable or not taxable because a certain word or phrase is used or because it is artificially structured, e.g., a sale at retail of canned software is not nontaxable just because it is labeled as a service. The form of the transaction does not override the substance nor reality. “[T]ax law deals in economic realities, not legal abstractions.” Greenwood Gaming & Entertainment, Inc. v. Commonwealth, 263 A.3d 611, 623 (Pa. 2021) (Saylor, J., concurring) (quoting PPL Corp. v. Comm’r of Internal Revenue, 569 U.S. 329, 340 (2013)). See also Golden Triangle Broadcasting, Inc. v. City of Pittsburgh, 397 A.2d 1147, 1151 (Pa. 1979) (economic realities should not be ignored when determining tax liability) (citing Commonwealth v. Arrot Mills Co., 22 A. 243, 243 (Pa. 1891)) (“the corporation must be measured not by what it calls itself, but what it does”).

When evaluating a sale at retail, the Department of Revenue will consider the details of the transaction. In addition to reviewing the invoice, other documents such as a contract, purchase order, and statements of work may be consulted for relevant information. If a purchase contains taxable and nontaxable components, the records must be sufficiently detailed to reflect which portions are nontaxable. 72 P.S. § 7271; Downs Racing, 196 A.3d at 611. In determining whether a charge is part of the otherwise taxable purchase price, among other things, consideration is given to whether there are separate agreements, the timing of the various agreements, whether the charge is for an item that is necessary for the tangible personal property to function, and whether the decision to incur the charge was dependent upon events occurring after the initial purchase. Id. at 612-13. That determination will be made in consideration of the broad definitions of “purchase price” and “sale at retail.” 72 P.S. § 7201.​

​Licenses — A license to use tangible personal property, including canned software, is subject to tax. The transaction remains taxable regard​less of whether the tangible personal property is digitally delivered, streamed, or accessed by other means. Moreover, the sale at retail or use of tangible personal property is taxable regardless of the billing method, e.g., per license, metered/consumption based, tiered/ feature based, etc.

• ​As discussed in Letter Ruling SUT-12-001, remotely accessed tangible personal property is subject to tax when the user is located in Pennsylvania. If the billing address for the item is a Pennsylvania address, all users are presumed to be located in the Commonwealth.
  
• Line 7 of Pennsylvania Exemption Certificate, REV-1220, allows for licenses to be allocated to out-of-state users. If the number of licenses purchased is greater than the number of users and the billing address is a Pennsylvania address, the unallocated licenses are subject to Pennsylvania tax.
  
• Employers regularly purchase canned software for their employees to use. In such instances, the employer does not have to pay Pennsylvania tax on licenses for those employees who exclusively use the canned software outside of Pennsylvania. However, the purchaser may only allocate licenses to out-of-state users if the users are employees of the purchaser. If the user is an employee of a different entity, a contractor, a customer, etc., the purchaser is considered the end user. However, in such instances, the purchaser may claim resale if the purchaser is in fact reselling the license. In those instances, the original purchaser must charge and collect sales tax for the users accessing the canned software in Pennsylvania.​
  

​​Configuration – Enabling specific functions or options within the existing canned computer software without altering the source code or creati​ng c​​ustom computer sof​tware  (See Modification regarding source code).

• Taxable as t​​he alteration of tangible personal property.​

​Consultin​g – Gathering information related to the goals and needs of the customer​ and linking these to software or hardware solutions. This involves analyzing a customer’s business process and requirements, in addition to documenting the customer’s needs for new or existing software or hardware.

• Taxable as part of purchase price if sold in conjunction with the sale of tangible personal property or other taxable services, even if invoiced separately.
• Non-taxable when the result is only a recommendation regarding the need for changes in implemented software or process and there is no transfer of tangible personal property.
• May be taxable as a help supply service if the provider is under the supervision of the customer to which the service is furnished.​
  

​​​Enhancement – Improvements made to software that increase its performance, capacity, or capabilities. They can also add functions, correct defects, or update the current version of the software.

• Taxable as the sale and/or alteration of tangible personal property if the underlying software is canned.
• Non-taxable if the underlying software is custom.
  

​Installation – L​oading or re-loading an application or canned program on computer hardware through downloading or from a disk.

• Taxable as the installation of tangible personal property whether installation is performed by the vendor of the application/canned program or a separate vendor. By its nature, the installation of canned software also involves the alteration of tangible personal property.​
  

​M​odification – Custom computer software programming for the specific customer that adds, edits, or changes proprietary software, such as modifying source code and application programming interface (API) creation. This does not include patches or updates that fix or enhance the computer software that are made available by the vendor (See Enhancement).

• Modifying the source code of canned computer software is taxable as the alteration of tangible personal property.
• Modifying the source code of custom computer software is non-taxable.
• Programming performed to add functionality to canned computer software, such as API creation, is taxable as part of purchase price if sold in conjunction with the sale of tangible personal property or other taxable services, even if invoiced separately.
• Programming is a non-taxable service if performed on or for the development of custom computer software.​
  

​Project Management – The supervision and management of others, project management, or h​​igher level consulting or advisory services such as strategic planning. This may include quality assurance and project management.

• Taxable as part of purchase price if sold in conjunction with the sale of tangible personal property or other taxable services, even if invoiced separately.
• May be taxable as help supply even if not sold in conjunction with the sale of tangible personal property.
• Taxable if there is no specific deliverable or outcome required of the vendor.
• Non-taxable if there is a contract that identifies a specific deliverable or outcome that is guaranteed or warranted, and the work is not supervised by the customer.​
  

​Repair – Any action to maintain the compatibility with any other software or hardware products or correct the function or performance of canned computer software. This does not include custom programming​ (see Modification); however, it does include troubleshooting and the correction or adjustment of a software defect.

• Taxable as the maintenance or repair of tangible personal property.​
  

​Support – Th​e providing of advice or guidance concerning otherwise taxable digital or electronic tangible personal property involving identifying the source of problems affecting the usability of the property and attempting to place the property in or restore the property to a useable state, including, but not limited to, what is commonly referred to as help desk support or call center support.

• Taxable as the suppo​rt of canned computer software.
• Separately stated charges for help desk or call center support where the vendor does not access the software are non-taxable.
  

​​​​Training – Training or instruction related to the use of canned computer software.

• Separately stated c​har​ges for in-person or live training, such as a webinar, are non-taxable.
• Charges for in person or live training that are not separately stated on a sale of tangible personal property are taxable.
• Charges for trainings materials or recorded sessions are subject to tax.
  

​​​​​Information Retrieval – A subscription for the right to obtain digitized products e​lectronically that may include a search function.​​

• Taxable as t​he access to canned software and/or taxable digital products.
  

​W​ebsite Development – The process of creating, building, and maintaining websites and web applications. It can include web design, programming, and database management.

• Taxable if the w​ebsite is transferred to the customer.  Both the website and ​​the maintenance of the website are subject to Pennsylvania sales and use tax as the transfer and maintenance of tangible personal property.  The tangible personal property may be canned software or any other otherwise taxable tangible personal property electronically or digitally delivered, streamed, or accessed.
• Taxable if the service provides access to a canned software program that allows the user to develop a website using no/low code interface or html programming with or without access to stock images or art that can be incorporated into the website.
• Nontaxable if the developer retains possession and control of the website. The creator is responsible for remitting tax on materials used or consumed in creating and maintaining the website.
• Separately stated fees for website hosting services are nontaxable.​
  

​​​​Data Sales – The sale of or providing access to data or databases containing data, generated, created, aggregated, or collected by a vendor of such.

• Taxable if the​ vendor provides customers access to a previously compiled database/ mailing list. This is true whether the vendor provides a printed copy or electronic access.
• Taxable if the vendor allows the customer to generate a unique list of data by the customer through the use of filters and search terms to the previously compiled database. The transaction is taxable as a license to use a software program.
• Nontaxable if the vendor is using its database to generate a unique report for a customer regardless of how the report/list is delivered.
• Nontaxable if it is a one-time license to use a list of names and mailing addresses for a delivery of direct mail advertising literature or materials, pursuant to 72 P.S. § 7204(35).