To list or not to list? Seems like a simple enough question. Your property tax listing should include all your business personal property, sometimes referred to as tangible property. So only tangible property should be listed, right? Before we get into that, let’s talk a little about the types of software.
Embedded Software: Embedded software is software that cannot be separated from the device without making that device useless. Would you ever consider removing the microcode from your tablet? Probably not. Without the microcode, the basic computer instructions, a tablet is nothing more than an expensive doorstop. It’s the software that tells a tablet it’s a tablet. It is such an integral part of the device, it cannot be separated. Likewise, its cost should not be separated from the cost of the device itself. Its cost should be included in the cost of the device and its taxability should follow the taxability of the device it is installed on. Since the tablet is considered personal property, then the cost of the embedded software would be included in the cost of the tablet and taxed accordingly.
Packaged Software: Packaged software is something you purchase off the shelf at an office supply store or off a virtual shelf through an online vendor. QuickBooks is a good example. Some folks get wrapped up in whether or not its tangible (delivered on a CD) or intangible (downloaded from the Internet). Others want to argue that they didn’t buy the software, they purchased a license to use the software. So that would make it intangible, right?
The NC Department of Revenue avoids both arguments. Can you blame them? Instead, NCDOR focuses on how the software is managed in your accounting records. Has it been (or will it be) capitalized? In other words, does it show up on your balance sheet as an asset? Or is it listed as an expense on your profit and loss report? If it is on the balance sheet it has been capitalized. Therefore, it should be treated like any capital asset. And all those costs that make it functional (related installation fees, development costs, customization fees, etc.) will be treated likewise.
Developed Software: Developed software is software that is created from scratch to meet the specific requirements of the taxpayer. It can be created internally or by a third party. Developed software is deemed to be excluded from personal property taxation if it was purchased or licensed from an unrelated party and has not been capitalized on the books. (Unrelated parties have no common or ownership/interest, either directly or indirectly, in the other party.) All costs necessary to bring it into service should be included in the cost of the software.
Customized Software: Customized software is software that has been purchased, then significantly tailored to meet the needs of the taxpayer. Significant customizations would involve taking a package that is unusable in its current state and modifying it to meet the taxpayer’s unique needs. In other words, it’s a mixed bag. Essentially, the base product is packaged, but the customizations are developed. In this case, software is taxable and the modifications are excluded.
So, to answer our original question, “Should software be included in your annual property tax listing?”, well sometimes…it depends!
Disclaimer: This article was written based on current North Carolina laws. Although there may be parallels, guidelines discussed here should not be assumed to be applicable in other states without verification. Contact the professionals at Gilliam Coble & Moser, LLP for additional guidance.