As a result, the U.S. has a patchwork quilt of state taxes on technological services. Some states that have tried to impose such taxes have failed spectacularly, and most have not tried at all.
According to the Tax Foundation, a nonpartisan think tank that studies taxes, only 10 states (Connecticut, New Mexico, Hawaii, South Dakota, Mississippi, Missouri, Nebraska, Tennessee, Texas and West Virginia) and the District of Columbia tax all writing or updating of software. Only New Mexico, Hawaii and South Dakota levy their general sales taxes on all software services.
States with sales taxes do, however, levy those taxes on software that is sold on CDs or other hard storage materials. About half the states also tax “canned” (non-altered) software that can be downloaded, according to the Tax Foundation.
Elia Peterson, an analyst with the foundation, said in a recent paper that states are reluctant to tax computer services in large part because it “is an especially mobile industry and could easily move to a lower tax state.”"
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