When are charges for computer programming or software-development services subject to Nebraska sales tax, and when are they treated as nontaxable temporary-employee wages?

Plain-English summary

Nebraska taxes computer software. Under Neb. Rev. Stat. §77-2702.07(3), the sales tax reaches all sales, licenses, or other charges for software — and, per Regulation 1-088.01A, the gross receipts from furnishing software include a consultant's services that result in a transfer of software to the client, even where no tangible property changes hands (coding, punching, or otherwise producing software). The one thing Nebraska does not tax is the labor of a person producing a taxable item for their own use — for a business, work done by its employees for the employer's use.

So charges for personal services that result in software are taxable unless they are the wages of an employee (temporary or permanent) who writes the software.

Why a bright-line test was needed. Software is often bought on a time-and-materials basis — the same way temporary employees are paid — so the invoice alone can't tell a taxable software purchase from a nontaxable temp-employee arrangement. This ruling supplies the other factors.

The three-part safe harbor. A company is treated as receiving the services of a temporary employee (so the payment is not taxed as a software sale) only if the written agreement expressly includes all three of these provisions:

1. The transaction is only to obtain the services of a competent temporary employee who will be under the company's control as to the manner of performance and the working conditions;
2. Neither the provider nor the temporary employee has any liability for the software's failure to perform; and
3. Any software produced belongs to the company, with full rights and control over future use and all copies.

If all three are not expressly in the written agreement, the charges are for providing computer software and the gross receipts are subject to sales and use tax.

What this means for you

A business hiring outside programming help

Whether you owe sales tax turns on your contract. If you want the arrangement treated as hiring a temporary employee (nontaxable), make sure the written agreement expressly contains all three provisions — control over the worker, no performance liability on the provider, and full company ownership of the software. Miss any one, and the whole charge is taxable.

A software consultant or staffing provider

If you deliver software and keep any performance liability or ownership, expect the charge to be a taxable software sale. To be treated as supplying temporary labor, put all three safe-harbor provisions in the contract.

Common questions

Q: Is custom programming labor taxable even if I receive no disk or tangible property?
A: Yes — §77-2702.07(3) and Reg 1-088.01A tax services that result in a transfer of software, with or without tangible property, unless the safe harbor applies.

Q: Does time-and-materials billing make it nontaxable?
A: No. The billing method does not decide it; the written agreement's terms do.

Q: What makes it nontaxable temporary-employee services?
A: A written agreement that expressly includes all three provisions — company control of the worker, no provider liability for performance, and full company ownership of the software.

Citations and references

• Neb. Rev. Stat. §77-2702.07(3) — imposes sales tax on furnishing computer software (all sales, licenses, or charges).
• Nebraska Sales and Use Tax Regulation 1-088.01A — includes in gross receipts a consultant's services that result in a transfer of software to the client.
• Three-part written-agreement safe harbor — control of the worker, no provider performance liability, and full company ownership of the software.

Source

• Landing page: https://revenue.nebraska.gov/about/legal-information/revenue-rulings-issued-tax-commissioner
• Original PDF: https://revenue.nebraska.gov/sites/revenue.nebraska.gov/files/doc/legal/rulings/rr010201.pdf

Original ruling text

Revenue Ruling 1-02-1

Sales and Use Tax - Computer Software. CHARGES FOR PERSONAL SERVICES THAT
RESULT IN THE PROVIDING OR PRODUCTION OF COMPUTER SOFTWARE ARE
TAXABLE UNLESS CERTAIN CONDITIONS ARE MET.
Advice has been requested as to whether charges for the personal services of computer programmers
and consultants that result in computer software are subject to the sales and use tax.
The Nebraska Revenue Act of 1967 in §77-2702.07(3) imposes a sales tax on the furnishing of
certain intangibles, including computer software. The imposition of the tax on computer software
include all sales, licenses, or other charges for computer software. Reg-1-088.01A states “The
gross receipts from furnishing software includes services provided by a consultant that result in a
transfer of software from the consultant to the client.” (emphasis added) This includes charges for
coding, punching, or otherwise producing computer software without the transfer of any tangible
personal property. However, the Nebraska Revenue Act of 1967 does not impose a sales or use
tax on the labor or services provided by a person that are part of the production or producing of a
taxable item for their own use. For a business entity, the tax is not imposed on the production of
items by employees for use by the employer.
Therefore, any charges for personal services that result in software are subject to tax unless it can
be shown that the payments are wages of an employee, whether temporary or permanent, who
writes computer software.
The distinction between purchasing software and hiring temporary employees has been confused by
common business practices in the software industry. A trend in the software industry, especially for
larger, more complex software programs, is for a company to pay for the computer software based
on time and materials rather than a fixed amount. Since this method is often used for paying for
temporary employees, the billing method does not distinguish between taxable sales of computer
software and nontaxable temporary employee services.
Since the billing method or the invoice cannot be used to determine if the transaction is taxable,
the purpose of this ruling is to provide guidance on other factors that can be used to distinguish
between a purchase of software which is taxable and the use of a temporary employee which is
not taxable.
When a company receives personal services, including those of a temporary employee, that result
in the providing or producing of computer software, the charges are subject to the Nebraska sales
and use tax unless the company and the temporary service provider have an agreement as set forth
below.
If the written agreement between the company and the provider contains all of the following
provisions, the company will be considered to be receiving the services of a temporary employee,
and the amount paid to the provider will not be subject to the sales and use tax as a sale of software.

1. The transaction is only to obtain services of a competent, temporary employee who will
   be under the control of the company as to the manner of performance and the working
   conditions.
   Nebraska Department of Revenue, P.O. Box 94818, Lincoln, Nebraska 68509-4818

Revenue Ruling 1-02-1

Page 2

2. Neither the provider nor the temporary employee has any liability for the failure of the software to perform.
3. Any software produced belongs to the company, and it has full rights and control regarding future use of
   any and all copies of the software.
   If all of these provisions are not expressly included in the written agreement, then the charges for the personal
   services are for providing computer software and the gross receipts are subject to sales and use tax.
   APPROVED:

Mary Jane Egr
State Tax Commissioner
February 11, 2002