Summary
Summary
This article explores New Jersey’s sales tax regulations on Saas, digital services, and digital products. It delves into the distinction between prewritten software and cloud computing services and highlights the state’s tax rates and exemptions.
Background
New Jersey’s framework is more nuanced than states such as New York or Texas. The key distinction is between electronically delivered prewritten software, which is treated as tangible personal property but can benefit from a business use exemption, and cloud computing services, such as SaaS, PaaS, and IaaS, which New Jersey generally treats as nontaxable services, unless the service is really a taxable information service.
New Jersey’s official Sales Tax Guide states that the Sales and Use Tax Act taxes retail sales of tangible personal property, specified digital products, and certain services, and that tangible personal property can include prewritten computer software delivered electronically.
It also states that most services performed on tangible personal property and specified digital products are taxable unless specifically exempted.
New Jersey Sales Tax on Digital Services and Products
New Jersey imposes sales tax on retail sales of tangible personal property, specified digital products, and enumerated taxable services. The current standard rate is 6.625%, and New Jersey has a single statewide sales tax rate, not a general state plus local layered structure.
The Division of Taxation’s current sales and use tax page confirms that New Jersey assesses 6.625% on most tangible personal property, specified digital products, and certain services unless exempt.
Use tax is the complementary tax. New Jersey’s Sales Tax Guide states that use tax is due when taxable tangible personal property, specified digital products, or services are purchased for use in New Jersey but sales tax is not collected, or is collected below New Jersey’s rate. The use tax rate is the same as the sales tax rate, 6.625%.
For remote providers, this means the analysis is not limited to software classification. It should also check whether the provider has economic nexus, whether sales are made through marketplaces, whether the product is taxable, and whether the purchaser has a valid exemption.
Canned or Prewritten Software
New Jersey treats electronically delivered prewritten computer software as tangible personal property. The New Jersey regulation at N.J.A.C. 18:24 25.5 states that retail sales of electronically delivered prewritten computer software are treated as retail sales of tangible personal property. It further states that such sales are taxable, unless the business use exemption applies.
This rule applies to software that is delivered electronically, such as by download or similar electronic transfer. If the software is delivered on tangible media, the special business use exemption for electronically delivered software does not apply.
Business use exemption
New Jersey provides a significant exemption for electronically delivered prewritten computer software used directly and exclusively in the purchaser’s business, trade, or occupation. The same regulation states that sales of electronically delivered prewritten computer software are exempt from sales and use tax if the software is used directly and exclusively in the conduct of the purchaser’s business, trade, or occupation.
How this provision translates in a practical scenario:
A New Jersey manufacturing business purchases a downloadable inventory management software licence for exclusive internal business use. If the software is electronically delivered and the use is directly and exclusively in the purchaser’s business, the business use exemption may apply. By contrast, if the software is delivered on a USB drive or other tangible storage medium, the exemption does not apply.
Customized Software and Contract Programming
New Jersey generally treats true custom software and contract programming differently from prewritten software. The Division’s information services guidance identifies contract programming services, consisting of the design, development, and implementation of computer programmes based on a client’s particular environment, as not an information service and not subject to tax.
The practical issue is whether the provider is genuinely developing software for one customer, or merely configuring a standard product.
How this provision translates in a practical scenario:
A Lithuanian developer builds a one-off internal logistics programme for a New Jersey customer, based on the customer’s specific operational requirements. The developer transfers the programme to that customer and does not sell the same software to others. This is closer to nontaxable contract programming or custom software.
By contrast, if the provider sells access to a standard software platform and adds customer-specific settings, dashboards, or workflows, the classification may shift toward SaaS or prewritten software depending on how the customer receives and uses the product.
Cloud-Based Software and Services
Saas
New Jersey’s core cloud computing guidance is Technical Bulletin T(72). It is particularly important because New Jersey does not generally tax SaaS merely because a customer remotely accesses software.
For SaaS, the Division states that the customer does not receive title or take possession of the software, and that the SaaS provider uses software it owns or licenses to provide the service. Therefore, the sale of SaaS is not a sale of tangible personal property, but a sale of a service. New Jersey also states that use of a software application is not listed as a taxable service, so most SaaS charges are not subject to sales tax.
The same bulletin explains that SaaS can be taxable if it meets the definition of an information service. Examples include services such as Westlaw, LexisNexis, CCH, and RIA, where the customer is purchasing access to information collected, compiled, or analysed by the seller.
PaaS
For PaaS, TB 72 states that the provider fully retains and operates the software applications, the customer has only remote access, and the customer does not receive title or take possession of the software. New Jersey treats PaaS as a service rather than a sale of tangible personal property. It also states that where the true object is the use of the platform and no tangible personal property is transferred, PaaS is not subject to sales tax, whether the software is located on a server inside or outside New Jersey.
IaaS
For IaaS, TB 72 similarly states that customers only have remote access, do not receive title or possession of software, and the IaaS provider is not treated as reselling a licence to use software. IaaS is treated as a service, not a sale of tangible personal property.
It is generally not taxable where the true object is the use of software and supported network infrastructure.
However, separately stated charges for telecommunications, utilities, network maintenance, or hardware repair may need separate analysis.
Data Hosting and Web Hosting
New Jersey’s bulletin states that data hosting services are not subject to sales tax because they are not specifically listed as taxable services. Web hosting services, including creative services, graphics, coding, traffic management, security, and server space to house a website, are also not taxable because they are not specifically listed under New Jersey’s Statutes for Taxation.
How this provision translates in a practical scenario:
An Italian SaaS provider sells a cloud-based project management tool to a New Jersey business. The customer only accesses the provider’s hosted software remotely, does not receive title, does not take possession of the software, and is not buying information compiled by the provider.
Under TB 72, the subscription is generally not subject to New Jersey sales tax.
Information Services
The most important SaaS exception is the taxable information service category. New Jersey defines information services as furnishing information of any kind that is collected, compiled, or analysed by the seller and provided by any means or method, except personal or individual information not incorporated into reports furnished to others. The Division’s information services page states that the tax applies to information services received by customers in New Jersey.
New Jersey distinguishes between a software tool that lets the customer manipulate its own data and a service where the customer is buying the seller’s compiled information.
Taxable examples may include: online legal databases, financial research databases, market intelligence subscriptions, credit reports, mailing lists, weather alerts, legislative tracking services, and online statistical databases, depending on facts.
Nontaxable examples may include: application service provider access where the customer enters and manipulates its own data, personal or individual reports not furnished to others, custom market research reports, consulting, contract programming, and professional services where the true object is advice or expertise rather than raw information.
Digital Products
New Jersey taxes specified digital products. The Sales Tax Guide states that retail sales of specified digital products are within the Sales and Use Tax Act. Older Division guidance on specified digital products states that these products are subject to sales tax when electronically delivered to a customer at a New Jersey address.
Specified digital products generally include items such as electronically delivered digital audio works, digital audiovisual works, digital books, and digital codes. The regulation on electronically delivered prewritten computer software also clarifies that music, ringtones, movies, books, and audio or video works delivered electronically are not treated as electronically delivered computer software.
This means they should be classified separately as digital products rather than software.
How this provision translates in a practical scenario:
A foreign platform sells downloadable e-books, digital audiobooks, or digital video downloads to New Jersey customers. Those transactions should be reviewed as specified digital products, not as SaaS.
Economic Nexus
New Jersey’s remote seller rules apply to remote sellers that make retail sales of tangible personal property, specified digital products, or taxable services for delivery into New Jersey and have no physical presence in the state.
Physical presence(trigger of nexus) can include employees, agents, representatives, an office, warehouse, other place of business, delivery by the seller’s own vehicle, and inventory stored in New Jersey regardless of ownership of the facility.
As of November 1, 2018, a remote seller should register, collect, and remit New Jersey sales tax if, during the current or prior calendar year, it either exceeds USD 100,000 of gross revenue from sales of tangible personal property, specified digital products, or taxable services delivered into New Jersey, or makes 200 or more separate transactions delivered into New Jersey.
Threshold calculation
The USD 100,000 threshold includes all sales of tangible personal property, specified digital products, and taxable services delivered into New Jersey, including nontaxable retail sales of tangible personal property and specified digital products.
Remote sellers making only sales for resale, or only nontaxable retail sales, are not required to register.
A remote seller that crosses the threshold should register and begin collecting and remitting tax on taxable transactions after the threshold is met. The Division allows a grace period of up to 30 calendar days to register and begin collecting and remitting. The transaction that causes the threshold to be exceeded does not itself need to be taxed by the remote seller.
Marketplace facilitator rules
New Jersey requires marketplace facilitators to collect and remit sales tax on facilitated retail sales. The statute defines a marketplace facilitator broadly to include a person that facilitates sales of tangible personal property, specified digital products, or taxable services through a physical or electronic marketplace, including by listing or advertising products, providing marketplace infrastructure, customer service, fulfilment, storage, pricing, payment processing, selling fees, or virtual currency features.
The same statute states that a marketplace facilitator should collect and pay sales tax on any retail sale made or facilitated to a purchaser in New Jersey, regardless of whether the marketplace seller itself is registered or required to collect.
New Jersey’s remote seller FAQ confirms that remote sellers are not required to collect and remit sales tax on marketplace sales of tangible personal property, specified digital products, or taxable services delivered into New Jersey because the marketplace facilitator should collect and remit the tax. The marketplace facilitator should collect regardless of whether the remote seller is above or below the economic threshold.
However, sellers using both marketplaces and their own websites should count both marketplace and direct sales when calculating the economic threshold.
Sales Tax Collection and Remittance
Local sellers
A New Jersey-based seller making taxable sales should register, collect 6.625 percent sales tax, file returns, and remit the tax unless an exemption applies.
Remote sellers
A remote seller should collect and remit New Jersey sales tax if it exceeds the economic nexus threshold and makes taxable direct sales into New Jersey. This can include taxable specified digital products, electronically delivered prewritten software not covered by exemption, taxable information services, and other taxable services.
SaaS providers
A SaaS provider is not required to collect sales tax on ordinary nontaxable SaaS merely because the customer is in New Jersey. However, it may have collection responsibility if the service is taxable as an information service or if part of the package includes taxable specified digital products, taxable electronically delivered software, taxable telecommunications, or another taxable component.
Marketplace facilitators
Marketplace facilitators collect and remit on facilitated marketplace sales. Marketplace sellers generally do not collect on those transactions, but they remain responsible for direct sales and for monitoring nexus.
Purchasers
If a taxable product or service is purchased for use in New Jersey and the seller does not collect tax, the purchaser owes New Jersey use tax. New Jersey’s Sales Tax Guide states that if no sales tax is paid on a taxable item or service, the purchaser owes 6.625% use tax.
B2C and B2B Tax Collection
New Jersey sales and use tax is not limited to B2C. It applies to taxable retail sales and taxable services unless an exemption applies.
However, B2B software transactions have important special rules:
A business purchaser may benefit from the electronically delivered prewritten software exemption if the software is used directly and exclusively in the purchaser’s business, trade, or occupation.
A business purchaser may issue resale documentation if buying taxable property, specified digital products, or services for resale.
A business purchaser may be exempt under a specific exemption, such as certain manufacturing or production exemptions, nonprofit exemptions, or government exemptions, where conditions are met.
A local sales tax registration number alone does not make a New Jersey business exempt.
FInal Remarks
New Jersey’s sales and use tax treatment of software and digital services is relatively favourable for ordinary SaaS and cloud providers, but it is not a blanket exemption for all digital business models. SaaS, PaaS, IaaS, data hosting, and web hosting are generally nontaxable, provided the customer only receives remote access and the service is not a taxable information service.
Electronically delivered prewritten software is taxable by default, but it can be exempt when used directly and exclusively in the purchaser’s business. Specified digital products and taxable information services are generally taxable.
Remote and foreign providers should register, collect, and remit New Jersey sales tax once they exceed USD 100,000 of New Jersey gross revenue or 200 New Jersey transactions in the current or prior calendar year, provided they make taxable sales.
Marketplace facilitators collect on marketplace transactions, while sellers remain responsible for direct sales and threshold monitoring. B2B sales are not automatically exempt merely because the buyer is sales tax registered. Valid exemption, resale, or business use documentation is required.
Frequently Asked Questions
Generally, ordinary SaaS is not subject to New Jersey sales tax where the customer only receives remote access to software and does not receive title to or possession of the software.
New Jersey generally characterizes this type of SaaS as a service rather than a sale of tangible personal property. However, SaaS may become taxable where the underlying offering qualifies as a taxable information service or contains other taxable compone
Generally, SaaS, PaaS, IaaS, data hosting, and web hosting can be nontaxable in New Jersey when they constitute services that are not specifically enumerated as taxable.
The precise classification remains important. A provider should determine what the customer is actually purchasing rather than relying solely on terms such as “cloud service” or “SaaS.”
Yes. Electronically delivered prewritten computer software is generally treated as tangible personal property and is taxable unless an exemption applies.
However, New Jersey provides an important business use exemption for qualifying electronically delivered prewritten software
Electronically delivered prewritten software can be exempt from sales and use tax when it is used directly and exclusively in the purchaser’s business, trade, or occupation.
This exemption is particularly important for B2B software transactions.
The conditions of the exemption should be carefully reviewed and supported by appropriate documentation. The same treatment should not automatically be assumed where software is supplied through tangible media.
True custom software and contract programming can generally receive different treatment from prewritten software.
Where a developer creates a bespoke program according to the particular requirements of a single customer, the transaction can potentially qualify as nontaxable contract programming.
Simply configuring or modifying a standardized product does not necessarily transform prewritten software or SaaS into custom software.
Generally, PaaS and IaaS are not subject to New Jersey sales tax where the customer receives remote access and does not obtain title to or possession of taxable software or other tangible personal property.
The transaction should nevertheless be examined for separately stated taxable components, such as telecommunications or other specifically taxable services.
New Jersey generally treats data hosting and web hosting as nontaxable services because they are not specifically enumerated as taxable services.
Web hosting can include server space and related website functionality, while data hosting can involve storing customer information remotely.
Bundled arrangements should be reviewed separately where they contain other taxable products or services.