Understanding situs for sales tax

We hear a lot about nexus and various thresholds but not as much as about tax situs.

The situs is the location in which a taxing event occurs. It’s easy to determine when the entire transaction occurs at the point-of-sale but is more difficult when the transaction involves numerous sites.

In direct retail, for instance, situs can influence sales tax obligations depending on where the tangible personal property is shipped from in origin states or where it’s shipped to in destination states (learn more about the difference here). Of course for products purchased and taken possession of at a physical storefront, the situs is the location of the store itself.

The SaaS question

Situsing can be complex for companies specializing in Software-as-a-Services (SaaS).

A company may, for instance, have a customer based in a state that levies sales tax on SaaS but many other users who access the software from all over the country.

Consider where the benefit of use is received. In this example, the benefit of use is received where the users are located. That’s the situs.

This still creates questions:

This scenario makes for not only a complicated taxing situation but for an unclear invoice to the customer.

Many businesses choose to apply tax based on the bill-to address of the customer.

In this situation, if the bill-to address is in a state that taxes SaaS, and the customer is aware that many of their users are accessing the software from states that don’t tax SaaS, the customer may ask you to break out the invoice accordingly. Other states, including Washington, have a “multiple points of use” exemption certificate that will relieve the seller from charging the sales tax and shift the responsibility to the buyer for accruing and remitting use tax. In this specific situation with Washington, the seller would still be responsibility for reporting retailing business and occupations tax.checklist for more information).

Leasing

The concept of situsing for leasing companies is relatively straightforward as the situs is based on the location of the leased property. Complications of the leasing industry include the taxability of different types of leases as well as when leased property moves from location to location.

For example, an equipment “lessor” owns TPP and leases the use of it to a lessee. This property that is owned by the lessor creates sales tax nexus wherever the equipment resides. The taxability of the lease itself and certain related services is much more complex.

In most states, the lease of real property long-term is generally not a taxable event. TPP is generally taxable whether through sales, lease or rental. Operating and finance (capital) leases also have different tax treatment. In most states, sales tax is imposed on the stream of payments for an operating lease and sales tax is imposed on the upfront purchase price for a capital lease.

When a lessee moves leased property from one state to another, the lessee is generally required to notify the lessor of such activity as in vehicle leasing. Other scenarios can be more complicated when a large piece of machinery is leased in one jurisdiction but used in multiple states over the course of the lease.

Struggling with complex sales tax situs issues in your business? Let TaxConnex be your sales tax solution. Our experts specialize in navigating the intricate world of sales tax for companies in various industries. Contact us today to learn more about how TaxConnex can help you streamline your sales tax process and ensure compliance, allowing you to focus on what you do best.