Tangible personal property has historically been subject to the collection and remittance of sales tax while many services have been non-taxable (or exempt). More and more services are becoming taxable and represent a potential big wave of tax changes and updates in the years ahead.
If your business sells software or software-as-a-service (SaaS), you deal with one of the most complex sales tax situations today. Many businesses assume that sales tax doesn’t apply to software or to SaaS. But over the last few years many states, their eyes on potentially huge sources of tax revenue, started taxing technology, digital goods, software, and SaaS.
SaaS is currently the predominant delivery method for tech/software companies, followed by electronically downloaded software. A few companies also continue to deliver software via a tangible medium, like a CD, but this is less common today. Each delivery method can have a different sales tax treatment in each of the states. Software delivered via CD still has the most states that tax it, while electronically downloaded software has fewer. SaaS is currently taxable for sales tax purposes in roughly half the states.
In addition to the taxability rules state-by-state, there are additional nuances within some states. Connecticut taxes SaaS, but at a reduced rate when sold to a business. Texas exempts 20% of the SaaS charge. Colorado exempts SaaS at the state level but many of the home-rule jurisdictions, including Denver, tax SaaS. Similarly, SaaS is exempt in Illinois but is subject to a 9% personal property lease transaction tax in the city of Chicago.
States also frequently tinker with and refine taxing of SaaS subscriptions. Most recently:
- North Carolina determined that in one instance there was no sales tax on subscription fees for SaaS because the taxpayer’s customers don’t receive a tangible copy of or an electronic download of the software as part of the fee.
- New York determined that a multi-level marketing company was not subject to state sales tax on its subscription-based sales of eSuite services because these services didn’t qualify as taxable sales of pre-written computer software or information service.
Tax situs is another challenge that many software business must address. The tax situs is the location in which a taxing event occurs. Tax situs can affect both nexus determination and taxability determination for SaaS businesses.
Let’s say a company has a customer in New York (which taxes SaaS) but the customer has individual users accessing the software all over the country, including in places that do not tax SaaS the same way New York does. From a sales tax perspective, you have to consider where the benefit of use is received. In this example, the benefit of use is received where the users are located.
But can that company really know from where a customer’s users are accessing the software? Does the company have nexus in all the states from where a customer’s users are accessing the software? What is the tax treatment in each of those states?
Because of this level of complexity, many businesses choose to apply tax based on the business bill-to address. A customer’s multiple-points-of-use exemption – attesting to certain users being outside a state or tax jurisdiction – can also relieve you of the obligation to charge sales tax on the entire invoice.
If you sell software, SaaS or digital services in multiple states, keeping on top of changing sales tax rules can be overwhelming. But not realizing your sales tax obligation or not acting on a growing obligation could have big repercussions for your business (see our checklist for more).
If you think your business may be impacted by sales tax developments or you just can’t keep up with the changing rules involving the taxability of your products and/or services, contact TaxConnex. TaxConnex provides services to become your outsourced sales tax department. Get in touch to learn more about SaaS tax determination.
Looking for more answers on the taxability of your SaaS products? Check out our SaaS taxability map!