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The majority of states which have addressed the issue and have concluded that software (at least unbundled software) is not tangible personal property for ad valorem tax purposes and therefore is generally not taxable.
Traditional Goods or ServicesPurchases of physical property like furniture, home appliances, and motor vehicles, are subject to sales tax in Arizona. Arizona does not charge sales tax on the purchase of groceries, prescription medicine, or gasoline.
Sales of canned software - delivered on tangible media are subject to sales tax in Arizona. Sales of canned software - downloaded are subject to sales tax in Arizona. Sales of custom software - delivered on tangible media are exempt from the sales tax in Arizona.
Sales of parts purchased for use in performing service under optional maintenance contracts are subject to sales tax in Arizona.
Arizona does impose sales and use tax on SaaS and cloud computing. Prewritten computer software or canned software, which includes software that may have originally been written for one specific customer but becomes available to others, are also taxable and considered sales of tangible personal property.
A131964 Appellate Court reversed lower court decision and holds that the right to replicate and install software is a property right, which is an intangible.
Under Arizona case law, software is treated as tangible personal property.
Only two states Tennessee and Vermont have specific statutes in place to address SaaS transactions and sales tax.
In most states, where services aren't taxable, SaaS also isn't taxable. Other states, like Washington, consider SaaS to be an example of tangible software and thus taxable. Just like with anything tax related, each state has made their own rules and laws.
California: SaaS is not a taxable service. However, software or information that is delivered electronically is exempt. The ability to access software from a remote network or location is exempt. Under California sales and use tax law, there must be a transfer of TPP, in order to have a taxable event.