Vermont taxes remotely accessed software … again

Vermont has once again changed how sales tax applies to remotely accessed software services, also known as cloud computing, software as a service, or SaaS. All sales of prewritten computer software, including prewritten software accessed remotely, are subject to Vermont sales and use tax as of July 1, 2024.

“Once upon a time everyone received software in some kind of tangible format,” says Scott Peterson, VP of Government Relations at Avalara. “That made prewritten computer software subject to sales tax everywhere because every state’s sales tax applied to all tangible property.”

Peterson explains, “all that changed when the internet allowed software to be delivered electronically or accessed remotely. Since that time, states have struggled with whether to tax something that isn’t tangible, and if so, how to tax it given the various ways customers receive or make use of software. This has played out over the years in Vermont, which has taxed, exempted, and then taxed these products.”

For a fuller picture, we offer this brief history of how Vermont taxes remotely accessed prewritten computer software.

In September 2010, the Vermont Department of Taxes published a technical bulletin that extended state sales and use tax to sales of products related to the internet and computers, including prewritten software — regardless of how it was accessed. 

Per the bulletin, prewritten software includes customized software compiled through the addition of separate sub programs, subroutines, or modules. Technical Bulletin 54 is no longer on the department’s website, but you can read a summary of it here, on page 6.

With Act 143 of 2012, the Vermont Legislature placed a temporary moratorium on taxing sales of prewritten computer software accessed remotely. Per the Vermont Department of Taxes Highlights of 2012 Tax Legislation: “Notwithstanding that the law imposes sales tax on such software, the tax will not be enforced for the period from January 1, 2007, to July 1, 2013.”  

The notice explains that “charges for remotely accessed software” means “charges for the right to access and use prewritten software run on underlying infrastructure that is not managed or controlled by the consumer or a related company.”

When the moratorium ended, the Vermont Department of Taxes again took the position that Vermont sales tax applies to prewritten software accessed from a remote server. However, it also drafted a regulation recommending a permanent sales and use tax exemption for remotely accessed prewritten software. 

The department accepted feedback on its proposal until October 1, 2014.

Next, the Vermont Legislature established a sales and use tax exemption for prewritten computer software accessed remotely with the enactment of Act 51; it took effect on July 1, 2015. 

Per Section G.8. (Cloud Tax) of Act 51: “Charges for the right to access remotely prewritten software shall not be considered charges for tangible personal property under 32 V.S.A. § 9701(7).” The statute 32 V.S.A. § 9701(7) states that “tangible personal property” includes “prewritten computer software.” 

That’s all it says — there’s nothing about how the software is accessed.

Fortunately, the Vermont sales and use tax regulations from 2019 are more descriptive. VT. Reg. § 1.9701(7)-1 reads: “‘Tangible personal property’ means personal property which may be seen, weighed, measured, felt, touched or in any other manner perceived by the senses. The statutory definition specifically includes electricity, water, gas, steam, and prewritten computer software, even if the software is delivered electronically. ‘Delivered electronically’ means delivered to the purchaser by means other than tangible storage media.”  

Per VT. Reg. § 1.9701(7)-2, “‘Prewritten computer software’ means computer software, including prewritten upgrades, which is not designed and developed by the author or other creator to the specifications of a specific purchaser.” 

This tax policy had a pretty good run, lasting July 1, 2015, through June 30, 2024, when it came to a screeching halt.

In 2024, the Vermont Legislature repealed the sales and use tax exemption for remotely accessed prewritten software with the enactment of H.887. The bill adds the italicized language to Sec. 3. 32 V.S.A. § 9701(7): “‘Tangible personal property’ includes electricity, water, gas, steam, and prewritten computer software regardless of the method in which the prewritten computer software is paid for, delivered, or accessed.”

It will be interesting to see how long this latest tax policy lasts, but if you’re in the business of buying and selling remotely accessed computer software in Vermont, you may not have time to ponder that just now. You’re probably too busy scrambling to ensure you properly apply Vermont sales and use tax to prewritten software accessed remotely. H.887 became law on June 17, 2024. The Vermont sales and use tax on remotely accessed prewritten software took effect July 1, 2024. 

Vermont isn’t the only state implementing sales tax policy changes this summer. Read our July 2024 sales tax changes blog post to learn more.