State Tax Policies Benefit High-Tech Businesses and Their Customers Too

Despite both the present downturn in the business cycle affecting information, communications, and other technology sectors and dwindling state budget surpluses, many states continue to enact new benefits or expand existing benefits for "high-tech" businesses. Over the past year, a number of tax programs tailored to a wide variety of high-tech companies have been put into place, particularly in the sales and use tax arena. Income tax benefits are also increasingly being provided to high-tech companies willing to invest or do business in certain states. States are actively promoting the growth of high-tech businesses similar to the way in which the manufacturing sector has been courted for years. Furthermore, recent developments indicate that states are branching out from the traditional incentive-type tax programs that offer benefits such as job creation and research and development credits and exploring new ways in which to support high-tech businesses.

While these policies may be designed to assist companies that provide high-tech goods and services, the customers of these businesses are often indirect beneficiaries of these measures, as well. Tax breaks for technology companies may translate into lower prices for goods and services provided by these businesses. In addition, many of the programs enacted for the benefit of high-tech taxpayers relate directly to the taxability of the goods and services provided by high-tech companies. When a state enacts a sales and use tax exemption for electronically transmitted software, for example, the seller is relieved of the tax collection responsibility, but, more significantly in many cases, the purchaser is relieved of the tax expense.

State support for the high-tech sector is often aided by the fact that many existing state tax structures do not contemplate certain high-tech transactions. This allows states seeking to promote the growth of the technology sector to limit the imposition of tax without necessarily changing their tax laws. For instance, in some states where the relevant statute does not clearly dictate the treatment of electronically transmitted materials, digitally transferred data has been deemed nontaxable intangible property for sales and use tax purposes rather than taxable tangible personal property. Likewise, from an income tax perspective, states are finally beginning to address complicated issues, such as how high-tech products and services should be treated for apportionment purposes.

This article examines certain aspects of the sales and use and income/franchise tax treatment of high-tech companies and the goods and services they provide, focusing on recent state initiatives. The article illustrates the wide variety of state tax benefits currently provided to participants in the technology sector and their customers. The article also analyzes how these tax policies and programs fit into existing tax structures.

What Is a "High-Tech" Business?

The "high-tech" label should not be associated only with computers, information systems, or the Internet. Many of the state tax benefits extended to the high-tech sector encompass a wider range of businesses. For example, over the past two years Hawaii has enacted and expanded a multi-tax package designed to promote the growth of high-tech industries. The benefits are available to companies engaged in: the development and design of computer software; biotechnology; performing arts products; sensor and optic technologies; ocean sciences; astronomy; or nonfossil fuel energy-related technology.1 Similarly, Virginia offers manufacturing and research and development sales and use tax exemptions to the following categories of businesses: computer software; information technology; biotechnology; computer aided engineering; and materials science.2

Sales and Use and Other Transaction Taxes

A majority of the tax activity directed at the high-tech sector involves sales and use taxes. Much of this activity focuses on either the "input" - the production of high-tech goods and services - or the "output" - the taxability of goods and services provided by high-tech companies. A number of states provide sales and use tax exemptions for purchases made by technology companies in the production or furnishing of high-tech goods and services. At the other end of the spectrum, many states choose not to impose tax on goods and services produced by technology companies. Other states have enacted programs that provide beneficial tax treatment to businesses in the high-tech sector as a class, such as blanket exemptions from certain types of taxes.

Purchase Exemptions

Most states that impose a sales and use tax allow manufacturers to purchase machinery, equipment, and other items used in the production of tangible personal property free of tax or at a reduced rate. A number of states have begun to offer similar purchase exemptions to high-tech businesses. The legislative intent behind traditional manufacturing exemptions is to encourage manufacturers to locate in a particular state. The extension of manufacturing-type exemptions to the high-tech sector reflects a parallel intent, on the part of states, to incentivize high-tech businesses to locate in their states.

Virginia extends its industrial manufacturing exemptions to producers of a broad range of high technology products.3 Under Virginia's "innovative technology" regulation, high-tech companies are not subject to sales and use tax on purchases of materials, machinery, tools, packaging containers, fuel, supplies, and other property used in the production of high technology products.4 However, the exemption is restricted to purchases of items used in the production of taxable property. The regulations specifically provide that the exemption would apply to property purchased for the production of taxable canned software but not for the production of exempt custom software.5 Nevertheless, purchases of certain property by high-tech companies engaged in research and development generally qualify for a research exemption, regardless of whether the property is ultimately offered for sale or if it is taxable to a subsequent purchaser.6

Likewise Georgia offers an exemption to a variety of technology-based companies for purchases. The exemption only applies to purchases or leases of computer equipment used in the state and is only triggered if the fair market value of the purchased (or leased) property is greater than $15 million.7 Thus the Georgia benefits are specifically tailored to companies making significant investments in technology in the state.

While Virginia and Georgia's exemptions apply to a wide range of taxpayers, several states continue to enact sales and use tax purchase exemptions directly tailored to Internet-related businesses. These exemptions vary considerably, some supporting the Web-hosting function, others supporting Internet service providers. However, they all promote Internet-related services by supporting one or more stages of the Internet transmission process. During 2000, New York enacted legislation exempting certain purchases by persons that act as Web hosts for Internet sites. The exemption applies to purchases of machinery, equipment, other tangible personal property, and even some services, by operators of Internet data centers.8 Eligible property includes hardware, software, fiber optic cable, climate control equipment, raised flooring, and security property, as well as services such as maintenance and repair, related to qualifying real and tangible personal property. Property must be used at least 50 percent in the provision of uninterrupted Web site services for sale (as opposed to promotion of its own Internet services and access). Note, unlike Virginia's innovative technology exemption, New York's exemption for Internet data centers applies despite the fact that Internet data centers provide a nontaxable service to their customers.

Likewise, Virginia offers another exemption, narrower than the innovative technology exemption, which is tailored specifically to providers of certain Internet services. During 1999, Virginia's statutory "media exemption" was extended to equipment purchased by certain Internet service providers (ISPs). The exemption applies to purchases by, among others, providers of "open video systems."9 The definition of open video systems was amended in 1999 to include the provision of Internet services, if proprietary and other content is provided as part of a package sold to end user subscribers.10 The Virginia Department of Taxation has clarified in a series of rulings that the exemption may be taken on purchases of computer equipment, software, servers and routers by an ISP as long as it provides both Internet access and some additional proprietary content to subscribers.11 Interestingly, the exemption does not appear to be restricted to the provision of services to unrelated third party end users. The only requirement appears to be that a fee be charged for the Internet access services. While structured differently, the New York and Virginia exemptions both provide tax incentives to providers of nontaxable internet services yet are directed at different aspects of Internet service, Web hosting and end user services.12

Still other states provide exemptions that focus specifically on promoting the newest technologies, such as high-speed Internet services. During 2000, Florida enacted a provision for purchases by communications service providers of equipment necessary to furnish broadband technology in the state.13 Eligible equipment includes switches, multiplexers, fiber optic equipment, and database equipment. The Florida exemption differs from other state provisions in that the sales and use tax must be paid up-front and then recouped by way of a refund. Furthermore, the refund opportunity is directed at expanding the provision of broadband services specifically. This exemption, like any, is subject to certain restrictions and limitations. Nevertheless, this program seemingly recognizes that the geographic availability of high-speed Internet access has not kept up with consumer demand.14 The benefits offered in Florida, like the purchase exemptions offered in other states for Web hosting or general Internet access, all serve the common goals of promoting the expansion of Internet services to end users and encouraging in-state location of service providers, despite the fact that such providers often furnish nontaxable services.

Taxation of Goods and Services Provided By High-Tech Companies

Determining whether the "output" of high-tech businesses is taxable is typically an issue of classification. Sales and use taxes are generally imposed on tangible personal property but not intangible personal property or, in many states, services. Electronically transmitted materials, which do not fall squarely into any category, raise a number of questions. Are downloaded digitized goods taxable tangible personal property or nontaxable intangible property? Should it matter whether the material is delivered on a disk or electronically? In a state that does not tax services, are such materials taxable tangible property or exempt as incidental to the provision of a nontaxable service? These are some of the questions that have confronted states in their dual efforts to devise fair tax policy for high-tech companies and promote the growth of the industry.

Many states exempt items transmitted electronically from sales and use tax on the grounds that digitized material is intangible personal property. Most of these exemptions relate to computer software; however, a few states have also addressed the taxation of other types of digitized goods. In some states, these exemptions may be motivated out of a desire to promote technology industries. In other states, the classification of digitized goods as intangible property may be based on formalistic interpretations of sales and use tax statutes that strictly construe the definition of tangible personal property to require transfer in a physical format. Whatever the rationale, sales and use tax exemptions for electronically transmitted material provide a significant benefit to both providers (by eliminating their tax collection obligation) and users (by eliminating their tax burden) alike.

Many electronic transmission exemptions pertain specifically to computer software.15 Neither California nor Virginia, for example, both of which have been at the forefront of the Internet revolution, tax electronically transferred software, including canned software. For California sales and use tax purposes, canned software is not subject to tax if transferred by remote telecommunications from the seller's place of business to the purchaser's computer.16 Virginia has not enacted an explicit exemption; however, the Department of Taxation has repeatedly held that the electronic transmission of computer programs by intangible means is a service.17 Services are generally not subject to Virginia sales and use tax.

While electronic transmission exemptions are beneficial to both software developers and their customers, it is often impractical to transmit large software programs electronically. Accordingly, some states have extended electronic transmission exemptions to "in-person" transactions that do not involve the actual transfer of possession of tangible personal property. The Massachusetts Department of Revenue issued guidance this past spring specifying that sales of canned software are not subject to sales and use tax when the software is installed on the customer's computer by the seller on-site but not left with the purchaser.18 California's exemption for electronically transmitted software also exempts sales of canned software installed by the seller as long as the seller does not transfer title or possession of any storage media to the purchaser.19 Such "load and leave" exemptions recognize the inconsistency between exempting electronically transferred material involving no tangible personal property but taxing the same transaction when the seller goes on-site, especially if neither transaction involves the conveyance of tangible personal property (i.e., disks).

States have also begun to address the taxation of other materials transmitted over the Internet. Illinois recently amended its sales and use tax regulations to clarify that downloads of information transmitted electronically, including books, music, newspapers and magazines, but excluding canned software,20 are nontaxable transfers of intangible property.21 The amended regulation, which was adopted May 8, 2001, reverses the Department's previous position that such electronically transmitted materials were taxable as transfers of software.22 Similarly, administrative rulings issued by the New York Department of Taxation and Finance over the past two years provide that sales of digitized music and digital photographic images over the Internet are both considered sales of intangible property and thus exempt from sales and use tax.23 Despite this exemption, electronically transmitted canned software remains taxable for New York sales and use tax purposes.24 Exemptions for digitized material (other than software) expand high-tech benefits beyond technology businesses to the sellers of traditional goods and services, as well as their customers.

The taxation of digital material has also received attention at the federal level. On June 28, 2001, the Jurisdictional Certainty Over Digital Commerce Act was introduced in the U.S. House of Representatives.25 The bill would exercise Congress' active Commerce Clause power by prohibiting states from enacting any laws, rules, regulations, or other provisions that regulate digital commercial transactions. While taxes are not explicitly mentioned, the bill is designed to restrict states from imposing taxes on goods and services transferred over the Internet. Although the bill is not expected to pass, it serves as another illustration of the trend of promoting Internet commerce. In the meantime, the taxation of digitized material is still largely unresolved, and, in fact, several states continue to treat such materials as taxable tangible personal property. Texas, for example, has ruled that electronically transmitted music is taxable tangible personal property because downloading music effects a physical change to the storage media on which it is placed.26 Tennessee has similarly ruled that the sale of software transferred exclusively by electronic means is taxable.27

Moreover, sales and use tax exemptions for high-tech products are not restricted to digital goods and services. California's technology transfer agreement exemption recognizes that the value of many mixed transactions is concentrated in the intangible property component of the goods sold. Under California law, agreements assigning or licensing a patent or copyright interest that also contain transfers of tangible personal property are not taxable to the extent of the value of the intangible property.28 Thus if designs, specifications, or prototypes of a patentable product are transferred to a licensee, the intrinsic value of the patent (potentially the bulk of the price) will not be subject to tax. If the intangible and tangible components are not separately stated, a reasonable fair market value for the tangible piece will be imputed. California's technology transfer agreement exemption transcends the narrow focus on computer software and the Internet industry and appreciates the breadth of the technology sector.29

Other Incentives for Technology Providers and Consumers

While a majority of the transaction tax benefits directed toward the technology sector take the form of either purchase exemptions or product exemptions, some states have enacted other creative measures designed to promote the growth of high-tech industries. This is particularly evident in Hawaii, where legislation has been enacted and expanded over the past two years to encourage the development of high-tech businesses.30 Among the measures enacted during 2001, is a blanket exemption from the general excise and public service company taxes for gross income received by public Internet data centers.31 Public Internet data centers are broadly defined to include facilities that house servers and provide 24-hour Internet access. This provision is similar to New York's sales and use tax exemption for purchases made by operators of Internet data centers.

Hawaii's high-tech incentives extend to technology users in addition to technology providers. For general excise tax purposes, Hawaii provides a broad intercompany service exemption for related parties. The 2001 amendments to the state's high-tech business legislation clarify that the intercompany exemption also applies to the use of computer hardware, software, information technology services, and database management between related entities.32 In addition, Connecticut is in the process of completely phasing out the sales and use taxation of computer and data processing services, which cover a wide variety of activities. The phase-out will be complete by July 1, 2002.33

Income and Franchise Taxes

Most states seeking to promote the growth of high-tech businesses have focused on providing sales and use tax benefits to technology companies. However, some states have recently begun to address the income tax treatment of technology providers and transactions as well. For example, Hawaii, over the past two years, has enacted one of the most comprehensive packages of income tax incentives available to the high-tech community. Several of these measures are discussed below. Increasingly, states are focusing on tax base issues affecting technology companies. This can be seen in increased credits for high-technology businesses as well as favorable treatment for technology companies with net operating losses (NOLs). Other states have begun considering how existing income apportionment provisions should be applied within the technology sector.

Income Tax Base Issues

Sale of Net Operating Losses: For multi-entity organizations, NOLs incurred by technology-based affiliates might provide immediate tax benefits, offsetting the income of profitable entities within the affiliated group for federal tax purposes and in states that allow consolidated or combined reporting. However, to the extent that NOLs are incurred by stand-alone entities or organizations that are generally unprofitable, NOL deductions may not be available for years to come, if ever. At least two states have recognized this problem and, in response, permit limited sales of NOLs.

Pursuant to New Jersey's Corporation Business Tax Benefit Certificate Transfer Program, new or expanding technology and biotechnology companies headquartered or primarily based in New Jersey may sell unused NOL carryovers.34 The program is subject to an application and approval process and tax attributes must be sold to unrelated purchasers. Otherwise, the program is fairly broad, applying to virtually any technology related company meeting statutorily defined criteria. Technology companies are defined to include companies that employ highly educated or trained managers or workers who use sophisticated scientific research service or production equipment, processes, or knowledge to discover, develop, test, transfer, or manufacture a product or service.35 Biotechnology companies are also broadly defined and include health-related, agricultural, and environmental pursuits.36 Under the program, NOLs must be sold to unaffiliated purchasers and must be sold for at least 75 percent of the surrendered tax benefit. Up to $10 million in surrendered benefits may be sold by a taxpayer, in the aggregate, under the program. However, a number of restrictions apply, primarily requiring that the seller not have been recently profitable or owned directly or indirectly by a profitable corporation. New Jersey also extended the carryover period for NOLs incurred by high technology companies from 7 years to 15 years. This expanded carryover period will apply as long as taxpayers engage in qualifying research activities, and only covers NOLs generated during taxable years beginning on or after July 1, 1998 and no later than June 30, 2001.

During 2000, Hawaii enacted a provision very similar to the New Jersey statute that also provides for the sale of NOLs.37 The benefit is available to businesses that conduct more than 50 percent of their activities in research related to the development and design of computer software, biotechnology, performing arts products, sensor and optic technologies, ocean sciences, astronomy, or nonfossil fuel energy-related technology.38 While the Hawaii benefits are available to a narrower range of businesses than those provided in New Jersey, the provisions are substantially similar: both impose an application and approval process; are applicable to a variety of technology-based businesses; and require that the seller not have been recently profitable (employing the same tests). However, the Hawaii provision caps the amount of NOL that can be sold per year at $500,000 and requires the sale to be valued at exactly 75 percent of the of the surrendered tax benefit. While the Hawaii provision does not require the sale to be made to an unrelated party, such a requirement would generally be irrelevant since Hawaii is a unitary combined reporting state, whereas New Jersey is a separate company state. The Hawaii provision further specifies that the benefit of the sale will not be taxable for corporate income tax purposes. Legislation enacted during 2001 clarified that the proceeds from the sale of NOLs would not be taxable for Hawaii general excise tax purposes either.39

A similar program was even contemplated this past year in Texas, a state notorious for aggressively taxing computer services. Legislation proposed during the 2001 biennial legislative session would have allowed development stage companies to receive up to $30 million from the sale of NOLs.40 However, the legislature adjourned before the legislation could be advanced, and the Texas legislature does not meet again until 2003.

Credits: Income tax credits provided to high-tech companies serve as a rough counterpart to the sales and use tax purchase exemptions discussed above. Both provide direct dollar-for-dollar tax reductions/exemptions to technology businesses and are often connected to other types of credits such as manufacturing, research and development, or investment tax credits. One example is the California Manufacturers' Investment Credit (MIC). The MIC provides a corporate income tax credit equal to 6 percent of the cost of qualified property placed in service in the state.41 Originally designed to capture traditional manufacturing type activities, the MIC was amended in 1998 to include property used to develop or manufacture computer software or systems, including computers and "peripheral" computer equipment as well as biotechnology activity.42 Similarly, Maine's high-technology investment tax credit provides an income tax credit to companies engaged in high-technology activities, which are basically limited to computer and Internet activities, computed by reference to the value of computer equipment purchased or leased and used in the state.43

Other states offer investment tax credits (ITCs) to taxpayers that invest a certain amount of money to develop a business in the state. Hawaii has enacted an ITC specifically tailored to high-tech businesses. The credit, which was significantly expanded during 2001, permits a 100 percent maximum $2 million credit, staggered over a five-year period for investments in qualified high technology businesses.44 Prior to the 2001 amendments, the credit was capped at $500,000, restricted to 10 percent of the investment in a qualified high-technology business and only permitted to be taken in the year the investment was made. For purposes of the ITC, an investment is defined to include a transfer of cash in exchange for stock (or other ownership interest), a right to use technology, or options, provided there is risk of loss.45

Hawaii's technology-based income tax credits are not aimed only at high technology companies. Among the new provisions enacted as part of the 2001 amendments to the technology incentives bill is a "technology infrastructure renovation" tax credit for the benefit of users of technology services. Taxpayers that incur renovation costs to improve the level of technology available in commercial buildings will be eligible for a credit equal to 4 percent of such costs.46 Eligible costs include those incurred to outfit a commercial building with high-speed Internet systems, security systems, HVAC and other environmental equipment, and backup electrical power sources. The renovation credit encourages property owners to offer the highest levels of technology to their tenants and provides a break to technology service consumers that choose to incur the cost of upgrading their technology systems themselves.

Other Tax Base Benefits: As part of the multi-tax package of benefits available to high-tech businesses, Hawaii provides that qualified high technology businesses may exclude royalties from patents, copyrights, and trade secrets from taxable income.47 This is a significant benefit to a company that develops lucrative technology and presents a meaningful incentive to conduct high-tech activities in the state.48 In addition, the Hawaii tax package offers personal income tax incentives designed to encourage the growth of the high-tech industry. As part of the 2001 expansion of benefits to high-tech businesses, Hawaii now provides that employees, officers, and directors of qualified high technology companies are not subject to tax on income derived from the sale of qualified high technology company stock, the exercise of stock options or warrants, or dividends distributed by high technology companies or their holding companies.49

Favorable Tax Rates: The District of Columbia provides one of the simplest benefits possible to high-tech businesses. For District of Columbia tax purposes, high technology companies, which include companies engaged in Internet-related services, information and communication technologies, engineering, biotech, and defense technologies, are subject to a reduced tax rate of 6 percent.50 This represents a significant reduction from the standard rate of 9.975 percent.51

Apportionment

One area that has been largely overlooked with regard to the taxation of high-tech businesses is apportionment. However, recent developments demonstrate that states are becoming aware of apportionment issues facing technology companies, both as a means to promote the growth of the technology sector as well as to accommodate an industry that does not fall neatly into the standard rules for apportionment of income.

Legislation introduced in Massachusetts earlier this year illustrates that apportionment factors may provide an effective tool to encourage high-tech companies to locate within a particular state. The proposed legislation would allow Internet services companies to apportion their net income to Massachusetts using a single sales factor.52 Internet services are broadly defined in the proposed legislation to include Web hosting, Internet advertising, Internet access, software or database hosting, online marketplaces, or online transaction processing. Receipts are only sourced to Massachusetts to the extent the benefit of the service is received in the state. The proposed legislation encourages companies to locate their facilities in Massachusetts by creating nowhere property and payroll factors through the use of a single sales factor.

Another issue involving apportionment involves the property factor treatment of computer software. Little guidance exists as to how users of computer software should account for that software for property factor purposes. The Arizona Department of Revenue recently issued a Corporate Tax Ruling specifically addressing the inclusion of computer software in a corporation's property factor.53 For Arizona tax purposes, real and tangible personal property is generally included in the property apportionment factor, while intangible personal property is excluded. However, the ruling provides that if a taxpayer capitalizes computer software for federal tax purposes, the software is included in its Arizona property factor. While the ruling attempts to distinguish intangible and tangible property by relying on the Internal Revenue Code (IRC) treatment, circumstances may arise where computer software meets the definition of an intangible asset for Arizona sales tax purposes (i.e., custom software) while also satisfying the requirement for capitalization under the IRC. The ruling further specifies that software is sourced to the state in which it is actually used, rather than the state where the original program is located. Thus the ruling provides taxpayers with the opportunity to dilute their property factor denominators to the extent custom software is used outside the state. Furthermore, since some other states require software to be sourced to the state where programs are physically located, multistate taxpayers may reduce their property factors in other states by maintaining physical copies of software programs in Arizona.

Franchise Taxes

Another area that is frequently overlooked is the franchise tax treatment of technology companies. Franchise taxes can impose substantial burdens on high-tech businesses. Franchise taxes based on net worth or capital stock values can produce tax liabilities for companies even though they may not be profitable. This is particularly relevant in the technology sector where losses are commonplace but positive net worth values generate franchise tax expenses that such companies can seldom afford. Earlier this year, Ohio's Governor Taft, recognizing this problem, proposed that high-tech companies be excused from the state's net worth tax for their first three years of operation. Unfortunately, however, the Governor's proposal became a casualty of the budgetary restrictions facing so many other states today. Nevertheless, it is encouraging that states are beginning to realize the effect of imposing franchise taxes on technology companies.

Conclusion

Even as many high-tech businesses are experiencing difficult financial circumstances, states continue to enact measures designed to promote the growth of the technology sector. Motivated by a desire to attract technology companies, states are exploring new methods for incentivizing a wide variety of high-tech activities. The benefits of these tax programs often inure to the consumers of high-tech goods and services as well as the companies themselves. At the same time, fiscal realities have already begun to restrict the states' budgetary flexibility to provide tax benefits. As such, high-tech businesses should actively pursue these opportunities while they are available.




[1] 2001 Haw. H.B. 1157 (Jun. 8, 2001), sec. 7, codified at Haw. Rev. Stat. 235-7.3.

[2] Va. Regs. Reg. 10-210-765.

[3] Va. Regs. Reg. 10-210-760.

[4] Va. Regs. Reg. 10-210-920.

[5] Va. Regs. Reg. 10-210-765.

[6] Id.

[7] Ga. Code Ann. 48-8-3(68).

[8] N.Y. Tax Law 1115(a)(37).

[9] Va. Code Ann. 58.1-609.6.

[10] Va. Code Ann. 58.1-602.

[11] Ruling of Comm'r, P.D. 00-18 (Va. Dept. of Tax. 2000); Ruling of Comm'r, P.D. 01-29 (Va. Dept. of Tax. 2001).

[12] In Ruling of Comm'r, P.D. 00-18 (Va. Dept. of Tax. 2000), the Department of Taxation explicitly stated that equipment purchased for use in providing Web hosting services was not eligible for the exemption because the exemption only applies to purchases made in connection with the provision of Internet access to end users.

[13] Fla. Stat. Ann. 212.08(5)(p).

[14] Florida has, effective October 1, 2001, created a new "communications services tax" on the transmission or sending of data or any other electronic signal by any technological means. This tax, which would be collected and remitted by the service provider, is broad and vague, and therefore will subject certain high tech businesses to additional use tax and collection and remittance duties, where they did not have those obligations before. This action seems counter to Florida's previous attempts to support high-tech industries.

[15] Virtually all states impose sales and use tax on canned software, while many exempt sales of custom software in whatever form transferred.

[16] Cal. Code Regs. tit. 18, 1502.

[17] Ruling of Comm'r, P.D. 99-80 (Va. Dept. of Tax. 1999); see also, Ruling of Comm'r, P.D. 98-15 (Va. Dept. of Tax. 1998); Ruling of Comm'r, P.D. 97-405 (Va. Dept. of Tax. 1997); Ruling of Comm'r, P.D. 96-72 (Va. Dept. of Tax. 1996); Ruling of Comm'r, P.D. 94-12 (Va. Dept. of Tax. 1994).

[18] Directive 01-03 (Mass. Dept. of Rev. May 8, 2001).

[19] Cal. Code Regs. tit. 18, 1502.

[20] Nevertheless, Ill. Admin. Code tit. 86, 130.1935 does exempt licenses of canned software where certain conditions are met, including a written agreement between the licensor and customer and restrictions on the customer's use and transfer of the software.

[21] Ill. Admin. Code tit. 86, 130.2105.

[22] See Private Letter Ruling No. ST-97-0342 (Ill. Dept. of Rev. 1997) (electronically transmitted driving records); Private Letter Ruling No. ST-94-0461 (Ill. Dept. of Rev. 1994) (electronically transmitted maps and demographic data); Private Letter Ruling No. ST-91-0212 (Ill. Dept. of Rev. 1991) (electronically transmitted mailing lists).

[23] TSB-A-01(15)S (N.Y. Dept. of Tax. & Fin. Apr. 18, 2001) (music); TSB-A-99(48)S (N.Y. Dept. of Tax. & Fin. Nov. 12, 1999) (photographic images).

[24] N.Y. Tax Law 1101.

[25] 2001 H.R. 2421.

[26] Comp. of Pub. Accts. No. 200005359L (May 30, 2000).

[27] Letter Ruling No. 00-32 (Tenn. Dept. of Rev. 2000), citing Creasy Systems Consultants, Inc. v. Olsen, 716 S.W.2d 35 (Tenn. 1986).

[28] Cal. Rev. & Tax Code 6011(c)(10).

[29] See also, Heather Preston v. State Board of Equalization, 19 P.3d 1148 (Cal. 2001) (in which the California Supreme Court clarified that the technology transfer agreement exemption applies broadly to any transfer of a patent or copyright, including the transfer of any partial copyright right, and transfers of patents or copyrights that are not necessarily associated with high technology (e.g., the decision involved the transfer of a copyright interest in artwork); the court also found that the exemption could be applied retroactively).

[30] 2001 Haw. H.B. 1157 (Jun. 8, 2001).

[31] 2001 Haw. H.B. 1157 (Jun. 8, 2001), sec. 3.

[32] 2001 Haw. H.B. 1157 (Jun. 8, 2001), sec. 12, codified at Haw. Rev. Stat. 237-23.5.

[33] Conn. Gen. Stat. 12-408.

[34] N.J. Rev. Stat. 34:1B-7.42a. Note, the program also provides for the sale of unused research and development credit carryovers.

[35] N.J. Rev. Stat. 34:1B-7.39.

[36] Id.

[37] Haw. Rev. Stat. 235-111.5.

[38] 2001 Haw. H.B. 1157 (Jun. 8, 2001), sec. 7, codified at Haw. Rev. Stat. 235-7.3.

[39] 2001 Haw. H.B. 1157 (Jun. 8, 2001), sec. 3.

[40] 2001 Tx. S.B. 96.

[41] Cal. Rev. & Tax Code 23649.

[42] Cal. Rev. & Tax Code 23649(d)(2), (4).

[43] Me. Rev. Stat. Ann. tit. 36, 5219-M.

[44] 2001 Haw. H.B. 1157 (Jun. 8, 2001), sec. 9, codified at Haw. Rev. Stat. 235-110.9.

[45] Haw. Rev. Stat. 235-1.

[46] 2001 Haw. H.B. 1157 (Jun. 8, 2001), sec. 2.

[47] Haw. Rev. Stat. 235-7.3.

[48] Similarly, for Michigan Single Business Tax purposes, royalties received and paid are excluded from the SBT tax base as modifications to federal taxable income. Mich. Comp. Laws 208.9(4), (7). Nevertheless, royalty income related to application or operating software is included in the tax base. System software royalties are excluded. Likewise, royalties paid with respect to application or operating software are not required to be added back in computing the SBT. For purposes of the addback, unlike the exclusion for royalty income, taxpayers are not required to add back royalties paid for system software.

[49] 2001 Haw. H.B. 1157 (Jun. 8, 2001), sec. 8, codified at Haw. Rev. Stat. 235-9.5.

[50] D.C. Code Ann. 47-1817.6.

[51] D.C. Code Ann. 47-1807.2.

[52] 2001 Mass. H.B. 2099.

[53] CTR 01-2 (May 1, 2001).