Mississippi sales tax applies to computer software and computer software services
We’ve known for some time that ringtones, software, and electronically stored or maintained music, reading materials, and video are subject to Mississippi sales tax. But the taxability of other digital products and services in Mississippi — especially those provided by out-of-state vendors — has been unclear.
The enactment of Senate Bill 2449 amends the state’s sales tax law to clarify how Mississippi sales tax applies to computer software and computer software services. The changes take effect July 1, 2023.
What’s changing with Mississippi sales tax?
Prior to enactment of Senate Bill 2449, the taxability of computer software (as opposed to simply “software”), computer software services, electronically stored or maintained data, and specified digital products was unclear. The Mississippi sales tax code simply didn’t address those products and services.
Senate Bill 2449 expands the definition of “retail sales” (aka, sales subject to sales tax) to include all sales of tangible personal property “physically or electronically delivered or located within this state” (with certain exceptions). “Tangible personal property” includes “computer software” — but not “electronically stored or maintained data.”
It’s now clear that the following products and services are subject to Mississippi sales tax:
- Computer software
- Computer software services
- Specified digital products
- Other products delivered electronically, including but not limited to games, music, reading materials, and ringtones
The state Mississippi sales tax rate is 7%. There are only two local sales taxes in Mississippi: The city of Tupelo currently levies an additional 0.25% sales tax on all retail sales made from taxpayers within the corporate limits of the city as well as services provided within city limits. The city of Jackson levies an additional 1% sales tax on certain retail sales and services made from taxpayers within the corporate limits. SB 2449 doesn’t reference local sales tax in Mississippi.
Mississippi doesn’t tax computer software maintained outside the state
Mississippi sales tax does not apply to computer software maintained on a server located outside of Mississippi and accessible for use only via the internet, or to electronically stored or maintained data.
Businesses that perform both interstate and intrastate computer software services “may utilize any reasonable formulae of apportionment” to tax the portion of the services performed within Mississippi and exempt the computer software services performed in another state.
Other sales tax changes established by SB 2449
Computer software or computer software services provided by one legal entity to another commonly owned, related, or affiliated entity shall be treated as a nontaxable transfer of property or services.
Mississippi sales tax does not apply to Infrastructure as a Service (IaaS) or Platform as a Service (PaaS) despite the fact that IaaS and PaaS are commonly understood to be cloud computing.
Sellers or service providers can allocate sales tax on bundled transactions by reasonably identifying the portion of the price attributable to each of the properties and services. The Mississippi Department of Revenue must approve the allocation methodology.
If a single license fee or other payment encompasses nontaxable products or services as well as taxable computer software and/or computer software services, the consumer, seller, service provider, or user may allocate the fee between the taxable and nontaxable items.
As with bundled transactions, the allocation must be reasonable and supported by books, records, or “the best information available.” The entire fee or payment will not be presumed taxable; should the allocation be challenged, “the commissioner must establish by a preponderance of the evidence” that the allocation method used wasn’t reasonable.
Mississippi telecommunications tax does not apply to computer software, computer software services, electronically stored or maintained data, or specified digital products.
The tax commissioner will create a system for purchasers to report and pay Mississippi sales tax directly to the state, rather than having the vendor collect the tax from them. Should a consumer elect to pay the tax, the consumer becomes liable for the tax and the vendor is relieved of the obligation to collect and remit sales tax in Mississippi.
Are other software tax changes on the horizon in Mississippi?
In 2022, Mississippi established a Taxation of Remote and Internet-Based Computer Software Products and Services Study Committee to examine how Mississippi sales tax law affects computer software products and services and to recommend a course of action. The committee published its findings on October 1, 2022.
SB 2499 turns many — but not all — of the committee’s recommendations into law. The committee also made the following recommendations:
All software sold to businesses for use as a business input should be exempt from sales tax in Mississippi
All software-related services sold to businesses for use as a business input should be exempt from sales tax in Mississippi
Whether the legislature will pursue the recommended sales tax exemption for business inputs remains to be seen.
Software sales tax is a pain point for businesses, as sales tax laws in many states haven’t kept up with advances in technology. Automating sales tax calculation, collection, and remittance with Avalara AvaTax can help.
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