Friday, January 22, 2010

Software Sales, Seller's Permits, and Sales tax

Dear Rich: I sell my apps exclusively through the Apple App Store and I'm planning to branch out and sell another program as a downloadable for Mac. Do I have to get a seller's permit and collect sales tax? You won't need a seller's permit for the App Store; you may need it for downloadable software. Read on (and check out our new app developer's guide.)
What's a Seller's Permit? A seller's permit, also called a 'resale permit,' authorizes you to make sales and collect sales tax from customers within your state. Since Apple is selling the apps to consumers, they would be responsible for collecting the sales tax if it were due. It's a different story if you are (a) selling downloads directly, (b) selling your apps on media devices such as CDs, or (c) you are selling application services. 
State Sales Tax Rules. In most states that collect sales tax, it's for tangible goods--items you can touch, such as jewelry, CDs, clothing, or food. Downloadable software and media has traditionally been off limits for sales tax. However, that may be changing as states have begun to realize the large tax revenues that are being lost. Reportedly, Alabama, Arizona, Colorado, Hawaii, Idaho, Indiana, Kentucky, Louisiana, Maine, New Mexico, South Dakota, Texas, Utah, Washington, and West Virginia now tax media downloads. Some of these states, like Kentucky and Washington, distinguish amongst downloaded materials - for example, taxing downloaded movies, music and eBooks, but not taxing downloadable software. The distinction apparently hinges on whether the download is traditional media or whether it's designed to perform a task--for example to clean up your registry. 
California Rules. One example is the California's sales tax rules (Regulation 1502) that state that:
"The sale or lease of a prewritten program is not a taxable transaction if the program is transferred by remote telecommunications from the seller's place of business, to or through the purchaser's computer and the purchaser does not obtain possession of any tangible personal property, such as storage media, in the transaction." 
In other words, without a physical object being transferred, no tax is due. On the other hand, if you convert your apps for sale as disk-based software, or you sell a guidebook to accompany your apps, that direct sale would be subject to sales tax because it involves physical goods. 
And if that weren't enough ... Also, a few states also tax services, so if you render application services you may have to collect tax on your invoices. (For example, all services are subject to sales tax in Hawaii, New Mexico and South Dakota.) The bottom line is that every state's list of exempt transactions is different, and states have different rules about when and how you must submit the tax. If you're caught doing business without a permit, you could be subject to a number of penalties--such as having to pay the sales tax you should have collected from your customers, along with a fine. You can find information on seller's permit requirements at the website of your state's tax agency. For a list of links to these agencies, go to the IRS website, choose "Business," then "Small Business/Self-Employed," then "State Links." Or, choose your state's link at the list of tax agencies provided at the website of the federal Small Business Administration. By the way, if you do have to pay sales taxes, there are, of course, several helpful iPhone apps for calculating it.
Whew ... was that long enough?  The Dear Rich Staff is exhausted!
Oh ... the movie. It's our favorite movie about a tax auditor?