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Over the years my business has bought computer software. Some counties are telling me that software is exempt, while others tell me it is taxable. What are the criteria to determine taxability?

Computer software has been complex since it was first introduced. Computer software is a class of personal property. It is comprised of several different subclasses of personal property that can be divided by use, development, distribution, and relationship to hardware. Software includes custom software, canned software and embedded software.

Because the valuation of software presents administrative burden to both assessing units and the taxpayers of New Mexico, treat the software classes as follows:

  • Canned (off the shelf) software is subject to property tax. It is valued using a three-year life and straight-line depreciation [Internal Revenue Code, Section 167(f)(1).]
  • If canned software is modified, only the canned portion is subject to tax.
  • Any software that comes with the equipment (i.e. Windows, etc.) is taxed as part of the machinery or equipment. Usually the cost of the machinery and equipment includes the embedded software.
  • Custom software that is customized for the company only and is subject to an exclusive license and greatly modified, is exempt from property taxation.
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