New Pennsylvania guidance expands software and digital goods taxation

The Pennsylvania Department of Revenue issued new, detailed guidance on the taxability of computer software, digital goods and related services — and it may surprise some businesses.

For tax purposes, Pennsylvania distinguishes between canned (i.e., off-the-shelf) and custom software. Since 2016, canned software products — as well as their maintenance, upgrades and support — have been classified as tangible personal property and subject to the state’s 6% sales and use tax. Custom software and related services are exempt.

In Pennsylvania, software vendors typically collect applicable sales tax at the point of sale.

In 2017, the state provided additional rulings to help IT vendors distinguish between taxable “support” services and nontaxable software “consulting” services. However, the distinctions were nuanced, and some answers remained unclear for software and IT providers.

What’s new in the Pennsylvania state tax guidance

The 2024 guidance does not overturn any previous rulings. Rather, it builds on them, offering more comprehensive explanations and examples.

One key clarification is that software-related services such as modifying, configuring or altering canned software are also taxable, whether these services are performed in conjunction with the sale or separately. This means ongoing software maintenance, updates and technical assistance — and their labor costs — are subject to Pennsylvania sales and use tax.

The new guidance also identifies the following canned software-related expenses as taxable:

• Licenses for users in Pennsylvania, regardless of the delivery or billing method.
  
  
• Configuration services that enable specific functions within canned software (short of altering the source code or creating custom software).
  
  
• Consulting services, depending on the timing and result. Pennsylvania defines consulting as gathering and analyzing information about customers’ goals and linking them to solutions.
  
  
• Enhancements and modifications that improve the performance, capacity or capabilities of canned software, including API development and modifications to correct defects.
  
  
• Installation and reinstallation of software by the vendor or another party.
  
  
• Project management is taxable as part of the sale, even if invoiced separately. Project management may also be taxable after the sale, depending on the contract terms and how the work is supervised.


• Software repairs to maintain compatibility or restore functionality.
  
  
• Support services related to software usability, including troubleshooting, help desk or call center support. However, if help desk or call center support is separately stated and the vendor does not access the software, it may be exempt.
  
  
• Training and instruction on using canned software, unless separately stated. Charges for training materials or recorded sessions are taxable.
  
  
• Electronic retrieval services, such as subscriptions for accessing digital products.
  
  
• Website development, if the site is transferred to the customer. This includes design, programming, database management, programming and maintenance. Development is also taxable if software enables users to build their own website using no- or low-code tools or HTML. Hosting services are nontaxable.
  
  
• Data sales that are generated, created, aggregated or collected by a vendor.

Full guidance is listed on the Pennsylvania Department of Revenue’s website.

Tax implications for PA vendors

The updated guidance impacts entities that sell digital products and services to users in Pennsylvania, including:

• Software vendors and developers that sell canned software or provide related services. They should assess their tax collection and remittance processes to help ensure compliance.
  
  
• Digital content producers that sell e-books, music, videos and apps. These companies must account for sales tax in their pricing and sales strategies.
  
  
• Organizations using canned software in Pennsylvania. Buyers must be aware of their use tax obligations, even if the seller does not collect Pennsylvania sales tax at the point of sale.

While the law has been in place since 2016, businesses are not expected to owe retroactive taxes solely due to this updated guidance. However, if a company misinterpreted its tax obligations — such as failing to collect or remit sales tax on taxable software or services — it could face potential tax liabilities for past periods.

How Wipfli can help

Pennsylvania’s updated guidance helps, but it doesn’t address every question — especially as technology, business models and delivery methods change. Wipfli can help you identify tax obligations, mitigate risk and liabilities, and develop a comprehensive strategy to stay compliant. Visit our state and local tax page to learn more.