Idaho Sales Tax on Software: Canned, SaaS, Custom, and Downloads

Idaho sales tax on software hinges almost entirely on how the software reaches the buyer. Canned software delivered on physical media like a disc or USB drive is subject to the state’s 6% sales tax. The same software delivered as a download, installed by a vendor without leaving any media behind, or accessed remotely through the cloud is excluded from the definition of tangible personal property and is not taxed. Custom software written for a single client is not taxed either, regardless of how it’s delivered.

Canned Software on Physical Media Is Taxable

Idaho Administrative Rule 35.01.02.027 defines canned, or prewritten, software as programs offered on an off-the-shelf basis with little or no modification beyond the settings needed to run them. If a seller licenses the same program to more than one buyer, that’s strong evidence the product is canned rather than custom.¹

When canned software is sold on storage media and that media stays with the buyer, the transaction involves tangible personal property and the 6% state sales tax applies. Certain voter-approved resort cities add a local option tax of up to 3%, which can push the combined rate as high as 9% in those areas. Sellers delivering physical software to Idaho addresses need to verify the buyer’s location to collect the correct local rate.²

This category covers boxed retail software, preloaded USB drives, and any other transaction where the buyer walks away with a physical object containing the program. The question is always whether tangible storage media changes hands and stays with the buyer.

Downloads and Electronic Delivery Are Not Taxed

Idaho specifically excludes electronically delivered software from the definition of tangible personal property. A buyer who downloads canned software from a website owes no sales tax on the purchase.² The administrative rule confirms this and extends the exclusion to “load and leave” installations, where a vendor loads software onto the buyer’s computer but doesn’t leave any physical media behind.¹

The rule even covers a scenario that trips up retailers. A box sold in a store that contains only a printed key code for downloading the software, with no disc inside, is not a taxable sale because no storage media changes hands.¹ The physical packaging doesn’t change the result.

The practical consequence: an identical product can be taxable or non-taxable depending solely on whether it reaches the buyer on a disc or as a download. A business selling the same accounting program both ways needs to collect tax on boxed copies and skip it on downloads.

SaaS and Cloud-Based Software

Software as a Service products, where you log into a provider’s platform through a browser or app without downloading the actual program, fall under Idaho’s statutory definition of “remotely accessed computer software.” The statute defines this as software a user accesses over the internet, private or public networks, or wireless media, where the user only has the right to use or access the software through a license, lease, subscription, or service agreement.²

Remotely accessed computer software is excluded from tangible personal property, so SaaS subscriptions are not subject to Idaho sales tax. The deciding factor is that the software stays on the provider’s servers and the buyer never receives a transferable copy. Most modern cloud applications fit this pattern, from CRM platforms to online design tools.

The Digital Entertainment Exception

Idaho carves out one meaningful exception to the general rule that electronically delivered and remotely accessed products escape taxation. Digital music, digital books, digital videos, and digital games are treated as tangible personal property when the buyer has a permanent right to use them, regardless of delivery method. Buy a video game as a digital download and own it permanently, and the purchase is taxable even though nothing physical changed hands.²

The statute draws its line at “permanent right to use.” Access conditioned on continued payment, like a monthly streaming subscription, is not a permanent right, and the exclusion from tangible personal property still applies. A one-time purchase of a digital movie is taxable. A monthly subscription to a streaming library is not.²

Custom Software

Software written from scratch for a single client’s needs qualifies as custom software, and Idaho does not tax it regardless of delivery method. The administrative rule defines custom software as a program designed and written by a vendor at a specific client’s request to meet a particular need.¹ The statute separately excludes “custom computer programs” from tangible personal property.²

A program can start as custom software for the original buyer and later become canned software if the developer sells it to additional customers. That transition matters. Once the same code is licensed to a second buyer on physical media, it falls under the canned software rules and the physical-copy sale becomes taxable.¹

Charges for custom development should be broken out separately on invoices from any charges for prewritten components, so the taxable portion, if any, is clearly identified.

Software Maintenance Agreements

Maintenance agreements often bundle future software updates with technical support, training, or consulting. The tax treatment turns on whether the agreement includes taxable components and whether the seller separates the charges.

If a maintenance contract covers both updates to prewritten software delivered on physical media (taxable) and non-taxable support services, and the seller doesn’t break out the charges on the invoice, the entire contract price risks being treated as taxable. Itemizing avoids that. List the update portion and the support portion as separate line items with separate prices, and only the amount allocated to taxable software updates is subject to the 6% tax.

Maintenance agreements that only provide access to downloadable patches and updates, with no physical media involved, should fall outside tangible personal property under the same electronic-delivery exclusion that applies to any other software download. Cleaner invoices mean less exposure.

Use Tax on Out-of-State Software Purchases

Idaho imposes a use tax that mirrors the sales tax rate. When an Idaho business buys taxable software from an out-of-state seller that doesn’t collect Idaho sales tax, the buyer owes use tax at 6% directly to the state. This most commonly applies to physical-media software ordered from vendors with no Idaho presence or registration.

Because electronically delivered software is not tangible personal property in Idaho, a download purchased from an out-of-state vendor doesn’t trigger use tax any more than it would trigger sales tax from an in-state seller. The use tax obligation tracks the same tangible-personal-property distinction that governs sales tax. If the transaction would be non-taxable for an Idaho seller, it is non-taxable for the out-of-state purchase too.

Businesses often overlook use tax on physical software ordered online from out-of-state retailers. If the vendor ships a disc or USB drive to your Idaho office and doesn’t charge Idaho tax, you are responsible for reporting and remitting the use tax on your next return.

When Out-of-State Sellers Must Register

Any business with an obligation to collect Idaho sales tax must register with the Idaho State Tax Commission before making taxable sales. Idaho establishes economic nexus for remote sellers at $100,000 in gross sales into the state during the current or previous calendar year. There is no separate transaction-count threshold. A software company located outside Idaho that sells more than $100,000 of taxable software to Idaho buyers must register, collect, and remit the 6% tax.

Physical presence also triggers a registration obligation from the first dollar of sales. Having employees, inventory, office space, or goods stored in a third-party warehouse in Idaho creates nexus. For software companies, this most often comes up when sales representatives travel to Idaho or when fulfillment centers within the state store physical product.

Businesses that cross a nexus threshold but delay registration face exposure to back taxes, penalties, and interest calculated from the date nexus was established, not the date they eventually register. Returns are generally due monthly by the 20th of the following month, though reduced filing frequency may be available with approval from the Tax Commission.

1
Cornell Law Institute. Idaho Admin. Code r. 35.01.02.027 – Computer Equipment, Software, And Data Services
2
Idaho State Legislature. Idaho Code 63-3616(b)