Information technology companies face a special challenge in sales tax and regulatory compliance, chiefly because of what you sell and how you sell it.

What do you do exactly? Sell Software as a Service (SaaS)? Provide an information service? A telecom service? Your company probably fits into at least one of these categories – or more than one, which is where sales tax obligations and regulatory compliance can get complicated.

Breaking this down is crucial for determining the taxability of your product or service.

Many technologies in one

Many telecom companies offer some varied combination of products and services involving SaaS, an information service that furnishes information/data compiled for the customer and delivered in either a tangible or electronic fashion and telecommunications for a fee delivered directly to the public.

Tech being what it is today, several household-name companies and products –Microsoft, Google, Slack and Zoom, for instance – use an overlapping combination of these products (more on this in a future blog).

SaaS alone can cross into the boundary of a telecommunications service with obvious communication services when it provides call routing, auto dialing or SMS messaging.

And many taxes

A traditional telecommunications company with a SaaS component in its products has to deal not only with communication taxation but also the already complex taxation of a SaaS business, both of which are new over the past 15 or so years as tax jurisdictions have tried to adapt to and apply tax rules our increasingly digital world.

If you have customers all over the country, you’re going to have exposure in thousands of jurisdictions – not just states but many cities and counties with special telecom taxes, 911 fees, utility taxes and license fees. You could end up with a couple hundred returns if you classify part of your service as a communications tax. Among these taxes:

State and local tax classification is fixed by state and local statutes and calculated by the nature of the transaction and the type of product/service sold. Services can be classified for tax purposes as tangible personal property, digital goods, telecom, SaaS or mixed services. Classification affects application of sales taxes, communication taxes, 911 fees and more. State and local jurisdictions may also classify the same service differently, leading to complicated obligations.

Regulatory classification can involve product placement. We don’t mean marketing but rather how you’re putting your product into the world and how you’re describing it. Your description of the product or service and understanding the underlying technology make a difference for your regulatory and tax positions.

Breaking down bundles

One of your first challenges in clarifying your sales tax and regulatory obligations is breaking down (aka “optimizing”) your products and services, which are likely bundled, so you can define your offerings as taxable or not taxable in a jurisdiction.

Generally, a successful optimization has four components:

  • Identifying the product/service and technology used to deliver it. What is in the bundle?
  • Accurate transaction type mapping. How do you break the parts of your product or service offerings into categories that can be mapped within the tax engine for accurate taxation?
  • Assigning allocations by transaction type to create the amount of tax obligation.
  • Books and records to support the optimization.

You’re looking for a plan and process of how to break your products up and how to put to put your business in a better tax position, a better pricing position for your customers and better competitive position (since your competitors may be doing a more thorough job calculating their tax position).

In upcoming blogs, we’ll examine successful optimization in more detail and explore how overlapping technologies in products and services can complicate optimization.

For more on this topic, check our webinar, “Deciphering Tax Obligations: Accurately Defining Your Technology Solution for Tax and Regulatory Compliance.”

If you’re looking to add a full end-to-end sales tax solution to your compliance processes, get in touch. With TaxConnex you get the best of technology and innovation combined with human expertise, oversight and dedicated support.

Robert Dumas

Written by Robert Dumas

Accountant, consultant and entrepreneur, Robert Dumas began his public accounting career on the tax staff at Arthur Young & Co., followed by a brief stint at Grant Thornton. In 1998, Robert founded Tax Partners, which became the largest sales tax compliance service bureau in the country, and later sold it to Thomson Corporation. Robert founded TaxConnex in 2006 on the principle that the sales tax industry needed more than automation to truly help clients, thus building within TaxConnex a proprietary platform and network of sales tax experts to truly take sales tax off client’s plates.