How to Tax Implementation Services for Software – Compliance Q&A
- Sales and Use Tax
- November 30, 2015 | Gail Cole
Sales tax compliance provokes interesting questions, many of which reach our ears. This week, we explore how implementation services for computer software are taxed in Michigan.
Please explain the taxability of implementation services for computer software in Michigan. I am having a hard time finding clear documentation on the Michigan Taxes website. Any help would be appreciated.
This is a great question, particularly since it highlights how difficult it can be to find accurate information about sales tax.
An initial answer is available in Michigan Compiled Laws Chapter 205, Section 205.54d, Additional sales excluded from tax. It highlights the following as excluded from Michigan sales tax:
- Specific charges for technical support or for adapting or modifying prewritten computer software programs to a purchaser’s needs or equipment if those charges are separately stated and identified.
- The sale of computer software originally designed for the exclusive use and special needs of the purchaser.
At first glance, implementation services for computer software are exempt from Michigan sales tax. Yet, as with most things related to sales tax, the issue is not as simple or tidy as it first seems.
Mixing services and tangible personal property
Sales transactions frequently involve more than one sales tax object and often they are intertwined. Under such circumstances, an auditor could view the entire transaction as a single sales tax object.
For example, services related to the sale software (tangible personal property, or TPP) may be exempt when delivered as stand-alone services. However, when sold in concert with the underlying software, the services may become inextricably linked to the sale of the software and therefore deemed taxable based on their relationship to the TPP.
Auditors tend to consider the following when determining taxability:
- Are services independently stated on the customer invoice?
- Does the underlying contract include both the delivery of the TPP and the related services?
- Are there separate invoices for the sale of TPP and the sale of services?
- Can delivery of the services be purchased separately?
- Are services actually delivered separately?
Need further clarification on the taxability of implementation services for software? Ask a question in our Q&A forum.