CONSIDER TAXES
Scrutiny on the taxation of both software and internet-related transactions is continually evolving at both state and federal levels. Specific to the sale and licensing of software are the timing of revenue recognition and the classification of support services. Guidelines surrounding software revenue recognition in compliance with generally accepted accounting principles (GAAP) specify that revenue normally be recognized upon the delivery of the software. Some agreements, however, include acceptance testing provisions (discussed above) which allow the customer to test the software before accepting it for purchase. Because the GAAP guidelines require deferral of revenue recognition if there is significant uncertainty as to whether such revenue will be realized, it is important for agreements to be specific and definitive in any acceptance testing provisions. For example, criteria foracceptance or rejection should be listed, a narrow time frame should be provided for, and the vendor should require a formal sign-off byits customer of acceptance. Similarly, any rights of cancellation held by the customer prevent revenue from being recognized by the vendor. Warranties that contain anything more than short term and minor rights in this regard may be problematic for the vendor. The tax consequences for the vendor must however be balanced with the need for appropriate acceptance testing of the software.
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