New Jersey – Charges for Software as a Service Not Taxable

SALT Report 1597 – The New Jersey Division of Taxation issued a Letter Ruling regarding charges by a Taxpayer to its clients for access to the Taxpayer’s online service.  The Taxpayer developed an online tool that allows users to create games and puzzles, such as word searches. The user is able to participate in the creation of the games by suggesting words that will be incorporated into the puzzles. The Taxpayer creates the puzzles and returns the finished product to the user in the form of a PDF file.
New Jersey does not tax software as a service if it meets the following criteria:
  • The seller fully owns and operates the software applications
  • The seller owns, operates and maintains the server that hosts the software
  • Customers access the software via the Internet
  • The software is not transferred to the customer, and the customer does not have the right to download, copy, or modify the software
The Division determined that the taxpayer provides software that is a service and because the Taxpayer met the above criteria its charges are not subject to sales and use tax.
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