Georgia Ruling Addresses Application of Sales Tax and Sourcing Rules on Computer Software

By: Jeff Glickman, SALT Partner

At a glance

• The main takeaway: A new ruling affirms Georgia’s position on sales tax and sourcing rules on computer software, upholding that software is taxable only if it is provided as a tangible medium and that the state does not apply a multiple points of use sourcing rule.
• Assess the impact: The rules for determining how each state taxes computer software, whether electronically downloaded or through a SaaS provider, varies and is not always clear. 
• Take the next step: Aprio’s State and Local Tax (SALT) team can assist your business with understanding the taxability of your computer software and where those sales should be sourced.

Schedule a free consultation today to learn more!

The full story

Over the last several decades, technological advancements have changed the manner in which consumers purchase computer software. Initially, software was sold on discs (floppy or hard) and USB drives that consumers would install directly onto their computers. Years later, software providers allowed consumers to directly download the software onto their devices, eliminating the need for a disc or USB drive. Fast forward to today where consumers can now access the software they purchased via the “cloud,” which is maintained by the provider (commonly referred to as software-as-a-service or SaaS).

During this time, many states enacted changes to their sales tax rules to account for the new ways in which providers sold software because their original laws only taxed software that was sold on a tangible medium. Today, most states tax software that is electronically downloaded, and about half also tax SaaS. However, there are still states, like Georgia, that apply their sales tax only to software that is provided on a tangible medium. This position was recently reiterated by the state in a private letter ruling.[1]    

A closer look at the case

The Taxpayer is a provider of design software that is loaded onto USB keys (treated as tangible personal property by the state), and then sold to customers. One particular customer visited the Taxpayer’s Georgia facility where it received several USB keys but refused to pay Georgia sales tax. The customer argued that it was going to distribute the USB keys to its employees, none of whom were located in Georgia.

The ruling addressed the following issues:

• Is the sale of prewritten computer software sold to a customer in Georgia subject to Georgia sales and use tax?
• Does a multiple point of use (MPU) tax exemption apply to the sale of the Taxpayer’s software ultimately used outside of Georgia?

The ruling explained

Regarding taxability, the ruling explained its longstanding rule that retail sales of tangible personal property are taxable, and that prewritten computer software is included in the definition of tangible personal property.[2] Georgia regulations clarify that prewritten computer software is taxable only when sold in a tangible medium; software delivered electronically or by the load and leave method is not taxable.[3] 

In addressing the MPU exemption, the ruling recognizes that other states provide an MPU exemption when a purchaser licenses software that will be used in multiple jurisdictions. However, Georgia has no such exemption. Under Georgia law, sales of tangible personal property that are received by the purchaser at the business location of the seller located in Georgia are sourced to Georgia.[4] This includes situations where the purchaser receives goods in Georgia and then subsequently ships them outside the state, as was the case here.[5]

Therefore, the ruling concluded that the Taxpayer’s sale of USB keys containing its software was subject to Georgia sales tax.

The bottom line

This ruling illustrates the importance of understanding how each state taxes computer software as well as how each state sources those sales. In states that tax electronically downloaded software and/or SaaS, the provider may not know at the time of the sale where the software will be downloaded or where its customer’s users are located. The rules for determining to which state those sales should be sourced differ among states and are not always clear.

Aprio’s SALT team has experience addressing the taxability of software and where those sales should be sourced. We can assist your business with these issues so that you are able to comply with your sales and use tax obligations and do not incur unexpected liabilities and penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

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[1] Georgia LR SUT-2024-02 (November 25, 2024).

[2] O.C.G.A. §§ 48-8-2(37) and 48-8-30.

[3] Ga. Comp. R. & Regs. 560-12-2-.111(4)(a) and (6)(a).

[4] O.C.G.A. §§ 48-8-77(b)(1)(A).

[5] See Inglett & Stubbs Int’l, Ltd. v. Riley, 339 Ga. App. 375 (Ga. App. 2016).