Technology companies have historically considered themselves fairly insulated from multi-state
sales and use taxes. Often operated out of a single location, technology companies view their sales tax footprint as limited to their state of headquarters. However, with virtual office technologies, companies can have employees working and/or selling from home throughout the country -- potentially creating nexus and sales and use tax exposure.
Many tech companies consider themselves a service provider and therefore exempt from sales and use tax. But in light of the 2018 Wayfair decision and an expanded definition of nexus, more businesses are now subject to sales and use tax collection on these services, including (but not limited to) software delivered electronically, “software as a service”, cloud-based solutions, VoIP, or streaming media.
There are two foundational building blocks when establishing a sales tax compliance process – sales tax nexus and the taxability of products/services.
The first step in determining whether or not a business has a sales or use tax obligation is assessing their nexus footprint. Nexus is a “connection” or a “link”. Sales and use tax nexus is defined as a person or entity having a direct or indirect relationship with a jurisdiction that requires the person or entity to comply with its sales and use tax laws. Nexus for sales and use tax purposes has been largely defined by three landmark cases, the most recent being South Dakota v. Wayfair.
The Wayfair case introduced the economic presence test. The idea was to simplify nexus, but many would argue that it had the opposite effect. Economic nexus is defined as a certain amount of sales or transactions in a state. However, each state is allowed to set their own threshold, which makes tax that much more complicated to keep up with. It’s also important to remember that economic nexus does not replace physical nexus.
Once you’ve determined in which states you have nexus for sales and use tax purposes, you need to determine whether or not your products/services are subject to sales and use tax in those states. Using the previously mentioned services, the following illustrates how many states impose a sales and use tax on each service:
Software delivered electronically -- taxable in 34 states
“Software as a service” or cloud-based solutions -- taxable in at least 18 states
Voice over Internet Protocol (telecommunications services) -- taxable in 41 states
Information services -- taxable in 13 states
The taxability of tech related services is constantly evolving. This is seen in software delivered electronically, as opposed to cloud-based SaaS solutions. One is taxable in 34 states, and the other is catching up, but still only taxable in 18 states. This can lead to misunderstandings as to the applicability of sales and use tax based on delivery method.
Understanding where you have nexus and the taxability of your products/services in those states where you have nexus will enable you to determine the tax due on each of your invoices to your customers – provided you know the applicable tax rate(s). TaxConnex has worked to assist technology companies alleviate the burden of sales tax for many years. We are experts when it comes to navigating tax regulations for these types of products and services. Contact us to learn more about how TaxConnex can take sales tax off your plate entirely.