A software client of mine is working with a client to secure a refund of tax erroneously charged on downloaded software. There is no question that the state does not tax downloaded software. The state has said they have no problem approving the refund once my clients "proves" they downloaded the software.
Sounds easy enough until you start to evaluate the documents in place to track downloaded software. The customer says it was downloaded but can't provide any electronic record of the process. My client says it was downloaded but they can't provide any detail either. There was no "shipping" charge on the invoice, but that is not conclusive. We have implemented new procedures to document these transactions.
As states continue to be aggressive on sales tax collections they will likely start demanding proof of every type of non-taxable transaction. Don't forget credit card receipts and slips. This can be a gold mine for many auditors because lots of companies don't keep these detailed records.
The point here is that the taxpayer has the burden of proof to support any non-taxable transaction it makes. Whether its downloaded software or a non-taxable service, the taxpayer has to have the documentation and "proof" to withstand an audit.
Your thoughts please!!
Happy New Year
