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Important Connecticut sales tax changes for digital goods

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On Sept. 4, 2019, the Connecticut Department of Revenue Services issued Special Notice 2019(8), explaining recent changes to the sales tax law effective Oct. 1, 2019. On that date, most “digital goods” will be subject to the 6.35% state sales and use tax rate. Vendors and tax practitioners should be aware that the current rate for all digital goods sold into Connecticut is 1%.

The state defines digital goods to include audio works, visual works, audio-visual works, reading materials or ring tones, which are electronically accessed or transferred. Digital goods also includes all canned or prewritten software. The department emphasized that the 6.35% rate applies regardless of the format of the sale; it applies to individual sales, subscription services, “in-app” purchases, and downloaded and streamlined materials.

Not everything sold electronically will be subject to the 6.35% rate. Newspapers and magazines, whether sold in print or online, are exempt from sales tax. College textbooks sold in print or online are also exempt from tax. And charges for access to online professional or academic research databases remain taxable at the 1% rate.

Importantly, sales of canned or prewritten software for business use generally remain taxable at the 1% sales tax rate. In that case, how the software is delivered is important. If the software is provided with any tangible personal property (such as a box, plastic container, or CD), even if such tangible personal property only authorizes the electronic access or transfer of the software, the sale is taxable at the 6.35% rate. To claim the reduced rate, a business purchasing electronically accessed or transferred canned or prewritten software, and any additional content related to such software, must provide information to the retailer that identifies its name, address, the name and title of the person placing the order, and the fact that the purchaser is a business.

The state will presume that software is subject to sales and use tax if the billing address of the consumer or subscriber is located in the state.

Takeaways

Vendors and purchasers of digital goods have a small window of time before most transactions are subject to the higher sales tax rate. Businesses purchasing software should be aware of the revised rules governing the lower sales tax rate. Taxpayers making purchases or sales of digital goods in Connecticut are encouraged to speak with their Connecticut sales and use tax adviser.

For more information on recent Connecticut state tax changes, please read our article, Connecticut enacts sweeping tax bill for 2019-20 fiscal year.

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