A Primer on the Taxation of Custom Software

This article was originally published in the Journal of State Taxation.

States often interpret the distinction between prewritten and custom software narrowly, leading to disputes among the government, custom software vendors, and purchasers. This article examines key risk areas when distinguishing between prewritten and custom software and highlights areas where taxpayers make costly mistakes. It also explains how modifications, method of delivery, and transfer of custom software in a transaction to a third party or between affiliated members of a group can affect the software’s taxability.