Since most businesses utilize software in their operations, it is important for tax and accounting professionals to recognize how the Georgia sales tax exemption for software impacts their business. GA Comp. R. & Regs. 560-12-2-.111(3)(b) provides a sales tax exemption on the sale, lease, rental, license or use of custom computer software. Custom computer software is defined as, “computer software, including custom updates, which is designed and developed by the author to the specifications of a specific purchaser” per GA Comp. R. & Regs. 560-12-2-.111(2)(e) This Georgia sales tax exemption for custom computer software will apply regardless of how the purchase obtains the software. A purchaser can receive the custom computer software through a tangible medium and it will not affect the taxability of the software since the tangible medium is considered incidental to the sale.

The real essence of the transaction with custom computer software is the professional service provided by the seller in the creation and development of the custom software program. If a software program that is developed to the specifications of a specific purchaser is then distributed for widespread use to different purchasers, the software ceases to be considered custom and would become subject to sales tax as prewritten computer software. However, the original purchaser can obtain multiple copies or license agreements of the custom software that was developed to their specifications and this would meet the criteria for the sales tax exemption.

While the Georgia sales tax exemption for software applies to customized programs designed and developed for specific purchasers, it does not always apply to modified prewritten computer software. GA Comp. R. & Regs. 560-12-2-.111(3)(c) states that, “prewritten computer software or a prewritten portion thereof that is modified or enhanced to any degree, where such modification or enhancement is designed and developed to the specifications of a specific purchaser, remains prewritten computer software.” This means that any modifications to “canned” software, which is defined as software which is “designed, prepared or held for general distribution or repeated use” per GA Comp. R. & Regs. 560-12-2-.111(2)(i), is not enough to change the composition of the software from “prewritten” to “custom” for Georgia sales tax purposes. The sales tax on modified prewritten computer software is only applicable when the software is sold for one lump-sum price. This means that a separately stated charge on the seller’s invoice for modifications or enhancements to prewritten computer software will qualify for a Georgia sales tax exemption since this is a nontaxable professional service.

As briefly mentioned in the discussion on custom computer software, the method of delivery can also determine whether a software purchase meets the criteria necessary to qualify for the Georgia sales tax exemption for software. GA Comp. R. & Regs. 560-12-2-.111(4)(a) states that, “computer software delivered electronically is not a sale of tangible personal property and therefore is not subject to sales or use tax.” The seller’s invoice, purchase contract or other documentation must clearly indicate how the software was delivered to the purchaser, otherwise the sale will be presumed to have been made through a tangible medium. In other words, the burden of proof remains with the purchaser to establish that the software was delivered electronically. When a purchase of software delivered electronically also includes software delivered through a tangible medium, the entire transaction is considered taxable unless the software qualifies as custom.

Finally, any discussion on the Georgia sales tax exemption for software must also include software installation and maintenance agreements. The installation charges of any computer software, whether it is prewritten or custom, are exempt from sales and use tax if they are separately stated on the seller’s invoice per GA Comp. R. & Regs. 560-12-2-.111(5)(a). The sales tax treatment of software maintenance agreements for prewritten software is a little more complicated and depend on whether the charges are bundled vs. separately stated from the sale of the software and depend on what is included in the maintenance agreement. Software maintenance agreements for prewritten software that are bundled with the sale of the software are subject to sales tax if they are provided in a tangible medium per GA Comp. R. & Regs. 560-12-2-.111(5)(b). Software maintenance agreements that are separately stated from the sale of prewritten software and include updates, upgrades, or enhancements delivered via tangible medium and include support services are deemed to be taxable at 50% of the software maintenance agreement’s total stated sales price per GA Comp. R. & Regs. 560-12-2-.111(5)(c). An alternate percentage may be allowed if the seller can establish the actual cost of estimated sales price of the software update, upgrade, or enhancement. Separately stated software maintenance agreements that only include updates, upgrades or enhancements delivered via tangible medium and don’t include any support services are subject to sales and use tax on the total sales price per GA Comp. R. & Regs. 560-12-2-.111(5)(d). Separately stated charges for software maintenance agreements that only include support services are exempt from sales and use tax per GA Comp. R. & Regs. 560-12-2-.111(5)(e). The tax treatment for each of the scenarios referenced above only apply to prewritten computer software; all maintenance agreements for custom software are exempt.

To claim the Georgia sales tax exemption for software, qualifying manufacturers need to complete Georgia Form ST-5 SST, which is a Georgia Streamlined Sales and Use Tax Certificate of Exemption, and provide a copy of this certificate to their vendors. For purchasers who have already paid sales taxes to their vendors on qualifying exempt software, they can complete and submit Georgia Form ST-12, which is a Claim for Refund, to recover the sales taxes which have already been paid from the Georgia Department of Revenue. The ST-12 must be filed within three years after the date of payment of the tax to the Georgia Department of Revenue, otherwise the statute of limitations will have lapsed, and any taxes paid in error will not be eligible for a refund.

Additionally, the ST-12 requires purchasers to get a signed Georgia Form ST-12A Waiver of Vendor’s Rights for each seller that they are including in the refund claim. This ST-12A form is used to verify that the seller collected and remitted sales taxes on the purchases included in the refund claim and that the seller will not or has not already issued a credit or refund to the purchaser. If the seller is out of business, cannot be contacted, or declines to sign the ST-12A form, the purchaser can complete the Georgia Form ST-12B Purchaser’s Claim for Sales Tax Refund Affidavit in lieu of providing the ST-12A. The ST-12B can only be completed if the purchaser has attempted to contact the seller for completion of the ST-12A. Both the ST-12A form and ST-12B form must be notarized to be accepted as valid by the Georgia Department of Revenue. The ST-12, ST-12A and ST-12B forms are all located on the Georgia Department of Revenue website. The experienced consultants at the Agile Consulting Group can provide expert guidance and assistance with the completion of all forms related to the exemption and refund claims.

As with all sales and use tax research, the specifics of each case need to be considered when determining taxability.

Have a question? Contact Aaron Giles.