Hot Topics: Taxability

Clients often ask us, “How often should we evaluate the taxability of our products?” An annual review should work. Most states change their sales tax rate laws on either Jan. 1 or July 1, by the calendar year or by the fiscal year.

But there are more than 10,000 jurisdictions in the U.S., and a ton of local jurisdictions with the authority from their states to change their individual tax rates.

For example, our recent “Hot Topics” webinar examined, among other topics, Michigan making separately stated installation charges exempt from sales tax effective April 26, 2023. Usually, such a seemingly random date is related to a precedent or court case or to lobbying effort or some other special event.

SaaS

Speaking of confusion, we often see a problem with companies knowing the actual taxability of what they’re selling. In the technology world especially, it’s not always cut and dry what’s being sold.

Take software-as-a-service. Kentucky was the latest state to subject SaaS to sales tax, effective last year. There are still a number of states that don’t tax downloaded software and even more that don’t tax SaaS, but we are getting to the point where about half the states tax SaaS.

Many providers assume that sales tax doesn’t apply to SaaS, which is often delivered via a cloud-based subscription application and may not seem to involve sales of tangible personal property (TPP). But a SaaS product may be taxable; so might your configuration and training expenses.

Contractors

A contractor is generally defined as someone who provides improvements to real property on a lump sum contract basis, and at first glance, the sales and use tax requirements for a contractor seem quite simple.

Contractors and sub-contractors are generally considered the end users of TPP that they buy, and they pay the sales tax. In many states, there are also rules that address contracts with nonprofits or exempt entities. (For more on sales tax in this field, see our eBook Sales & Use Tax for Contractors.)

Among recent significant developments, this year Alabama became the latest state to rule that exemptions can be granted for contractors and subcontractors who purchasing building and construction materials used in the performance on a contract with an exempt entity.

Exemption certificates

A sales tax exemption certificate alleviates a company from collecting and remitting sales tax on certain products and services. The purchaser – not the retailer/business – has the responsibility for determining whether a sale is exempt from tax.

If the purchaser does not submit a valid exemption certificate to the business, the business has the responsibility to assess and collect the sales tax from the purchaser. Responsibility to determine the validity of the sales tax exemption certificate is held by the business, and only valid exemption certificates protect a business from assuming responsibility for the sales tax on the exempt transactions.

When does an all-important exemption certificate expire? Some states have expirations, but many don’t. In a recent update discussed in our webinar, Utah made it effective last year that sellers were required to obtain an updated exemption certificate if more than 12 months had elapsed between transactions.

We’re also often asked where to research taxability. It’s a tall order – thousands of different statutes exist in each state – but there are tools to help you get these answers. At Taxconnex, we often use Thomson Reuters Checkpoint.

Next time, we’ll look at developments in sales tax rates.

(For more, listen to our “Hot Topics” webinar about the latest developments in sales tax.)