You want to know why Avalara tax codes for downloaded software are not exempt in New Jersey.
New Jersey's definition of "tangible personal property" includes "prewritten computer software including prewritten computer software delivered electronically." See N.J.S.A. 54:32B-2(g).
New Jersey sales tax is imposed on "the receipts from every retail sale of tangible personal property." See N.J.S.A. 54:32B-3(a). However, an exemption is provided for "receipts from sales of prewritten software delivered electronically and used directly and exclusively in the conduct of the purchaser's business, trade or occupation." See N.J.S.A. 54:32B-8.56. As the exemption is only available due to the unique use of the tangible person property, the sale must be supported by a properly completed Form ST-4, Exempt Use Certificate. See Bulletin S&U-6, Sales Tax Exemption Administration. As such, Avalara tax codes related to downloaded software have been set to return as taxable in New Jersey.
Furthermore, New Jersey is a member of the Streamlined Sales Tax (SST). SST is an organization wherein member states seek to harmonize sales tax administration. Avalara is a Certified Service Provider (CSP) for SST. In our role as CSP we seek certification of our codes from member states’ tax authorities. The New Jersey Division of Taxation certified AvaTax code DC010500 and other tax codes related to downloaded software as exempt only when accompanied by an exemption certificate. Avalara is bound by the state’s tax determination.
Use of the appropriate Entity Use Code will return an exempt result. You can also create a custom rule to return the desired tax result.
NOTE: SST-registered vendors don't have the option to create a custom code or rule.
For general information on taxability of software in New Jersey, see this document from the New Jersey Division of Taxation.