Dear Rich: Nolo’s Patent, Copyright & Trademark Blog

Dear Rich: I sell my apps exclusively through the Apple App Store and I'm planning to branch out and sell another program as a downloadable for Mac. Do I have to get a seller's permit and collect sales tax? You won't need a seller's permit for the App Store; you may need it for downloadable software. Read on!

What's a Seller's Permit? A seller's permit, also called a 'resale permit,' authorizes you to make sales and collect sales tax from customers within your state. Since Apple is selling the apps to consumers, they would be responsible for collecting the sales tax if it were due. It's a different story if you are (a) selling downloads directly, (b) selling your apps on media devices such as CDs, or (c) you are selling application services. 

State Sales Tax Rules. In most states that collect sales tax, it's for tangible goods--items you can touch, such as jewelry, CDs, clothing, or food. Downloadable software and media has traditionally been off limits for sales tax. However, that may be changing as states have begun to realize the large tax revenues that are being lost. Reportedly, Alabama, Arizona, Colorado, Hawaii, Idaho, Indiana, Kentucky, Louisiana, Maine, New Mexico, South Dakota, Texas, Utah, Washington, and West Virginia now tax media downloads. Some of these states, like Kentucky and Washington, distinguish amongst downloaded materials - for example, taxing downloaded movies, music and eBooks, but not taxing downloadable software. The distinction apparently hinges on whether the download is traditional media or whether it's designed to perform a task--for example to clean up your registry. 

California Rules. One example is the California's sales tax rules (Regulation 1502) that state that:

In other words, without a physical object being transferred, no tax is due. On the other hand, if you convert your apps for sale as disk-based software, or you sell a guidebook to accompany your apps, that direct sale would be subject to sales tax because it involves physical goods. 

And if that weren't enough ... Also, a few states also tax services, so if you render application services you may have to collect tax on your invoices. (For example, all services are subject to sales tax in Hawaii, New Mexico and South Dakota.) The bottom line is that every state's list of exempt transactions is different, and states have different rules about when and how you must submit the tax. If you're caught doing business without a permit, you could be subject to a number of penalties--such as having to pay the sales tax you should have collected from your customers, along with a fine. You can find information on seller's permit requirements at the website of your state's tax agency. For a list of links to these agencies, go to the IRS website, choose "Business," then "Small Business/Self-Employed," then "State Links." Or, choose your state's link at the list of tax agencies provided at the website of the federal Small Business Administration. By the way, if you do have to pay sales taxes, there are, of course, several helpful iPhone apps for calculating it.

Whew ... was that long enough?  The Dear Rich Staff is exhausted!

Oh ... the movie. It's our favorite movie about a tax auditor?

Learn more about software development with Stephen Fishman's A Legal Guide to Web & Software Development.

Dear Rich: My wife and I create applications together. Do we have to file a partnership tax return or can we file as a sole proprietorship? Whoa! The Dear Rich Staff usually doesn't do tax questions but since this is AppDev week here goes ...  

One Approach. According to this IRS directive, spouses that co-own and run a  business in a community property state (Arizona, California, Idaho, Nevada, New Mexico, Texas, Washington, and Wisconsin) can operate as a sole proprietorship (or "disregarded entity") and report their business income as part of their joint tax return (which has several obvious benefits) or they can operate as a partnership and file a K-1 partnership return. Couples in non-community property states, see below.

And here's another IRS bulletin. According to this IRS directive, if spouses co-own and run a business in a non-community property state, they must operate as a partnership and file a K-1 partnership return (unless they choose to be treated as a "qualified joint venture.") In all states, if one spouse owns the business and the other works for it, the business is a sole proprietorship, and the owner will have to declare the spouse as an employee or independent contractor. If the spouse occasionally volunteers to help the business without pay, you won't have to declare the spouse as an employee or independent contractor. 

Dear Rich: My band is thinking about forming an LLC and we've been told that one of the reasons to do it is to save on income taxes. This is the first year we're together and we're making a lot of money with corporate gigs so we're looking for any way at all to cut down on taxes. Will an LLC save us money at tax time? I'm so glad you asked. The short answer to your question is, "Probably not." Of course, nobody on the Dear Rich staff is an accountant so we can't be positive about your situation, blah, blah, blah. (Check with your accountant.). But with an odd exception, LLCs are taxed the same way as partnerships and they take the same deductions. So it's hard to see how you will save any dinero on April 15.