Vendors and Software Sales Tax
The 2018 Wayfair decision from the United States Supreme Court was landmark in expanding sales tax liability to out of state sellers and the categorization of Nexus. Software vendors are now subject to assessment and collection of sales tax on their taxable goods and services, including (but not limited to) software delivered electronically, Software as a Service (SaaS), cloud-based solutions and/or streaming media.
When a software vendor establishes nexus in a jurisdiction, the vendor is now responsible for collecting and remitting sales tax. States are aggressively enforcing tax regulations and companies are seeing an uptick in sales tax audits. Often times, tax jurisdictions hit with lack of revenue are the first to audit; a prime example is the recent sales tax deficits brought on by the economic downturn during the Corona virus pandemic. It’s an especially important time to ensure your company is being charged the correct sales tax, or you could easily have a sales tax liability on your hands.
In addition, the majority of states have passed Economic Nexus laws that put the responsibility of collecting and remitting sales tax on vendors.
What Most Software Companies Don’t Understand About Sales Tax
Technology providers need to look at a couple of variables in order to develop a strategy to take care of their sales tax obligations.
Questions providers need to ask themselves:
- Do we have a legal obligation to collect sales tax or are we going to put that responsibility on our customers?
- Have we determined what our product is and apply that determination consistently across all the states we are currently selling?
Licensed Software Subjected to Sales Tax
SaaS is currently subject to sales tax in 18 states and 6 additional states with pending legislation. Most software vendors, prior to the 2018 Wayfair decision, viewed their sales tax footprint as limited to the state their headquarters resided. In some cases, software vendors may not even realize they are required to collect and remit sales tax. In other situations, software vendors may claim their software is SaaS (Software as a Service) because they bill monthly for their solution.
It’s important to note that just because a provider calls their software SaaS, it doesn’t necessarily mean a state auditor would come to the same conclusion. Bottom line, when a software vendor doesn’t do their due diligence for sales tax liabilities, the burden could fall to the customer.