Software Sales Tax FAQs
Modas provides a multitude of complimentary consultations in regards to how sales tax is applied to Software as a Service.
Below, we have included a few frequently asked questions regarding Software and sales tax. These answers are general and each state has different provisions. Please contact us if you would like to discuss your Software business sales tax strategy in more depth.
The 2018 Supreme Court ruling of South Dakota v. Wayfair, Inc. (Economic Nexus Legislation) paved the way for states to start collecting sales tax on in-state transactions from out of state sellers.
As of August 2020, 45 States have enacted economic nexus laws.
Basically, if you (the seller) have sold a specific amount of revenue or transactions in a respective state, you are required by state law to assess and collect sales tax on all transactions in that state. You are presumed to be liable for the collection of sales and use tax, even if your company does not have a physical presence in that state.
Let’s break it down even further:
If the seller meets either of the below criteria in the previous or current calendar year you must collect sales tax:
- The seller’s gross revenue from the sale of tangible personal property (TPP), any product transferred electronically, or services delivered into exceeds $100,000*
- The seller sold tangible personal property, any product transferred electronically, or services for delivery in 200*& or more separate transactions.
*This number differs from state to state so check your state Nexus Threshold
From a best practices and customer experience business perspective, here is why you should always collect sales tax on your transactions at all times:
You are selling a taxable good or service to a customer and not charging them tax. Ultimately, this means you are now putting the tax liability on your customer to file a use tax return in their state and pay it themselves. You are fundamentally assuming the customer knows the product or service they are purchasing will need to be taxed. And, if your customer doesn’t know to file the use tax return on your sale to them, they are now exposed to taxes, penalties and interest on the purchase they made from you.
Let’s look at it from your customers point of view.
Would you buy goods or services from a company that did not collect sales tax and put you on the radar of your State’s Department of Revenue for a future sales tax audit? Probably not. Which is why, to protect your future revenue and your customer at all times, you should always collect sales tax on your transactions at all times.
What you are claiming to sell as a ‘service’ and is nontaxable, may be correct in one state but that doesn’t necessarily mean that it is isnt taxable in other states. Which opens up liabilities if you are not properly assessing SaaS sales tax in the states that do consider the service you are selling taxable.
Each state has their own laws on what and how much sales tax should be assessed on transactions.
SaaS or Software as a “Service” is subject to sales tax in:
- 18 States
- 6 additional states charge sales tax on SaaS depending on whether the customer is a business or an individual consumer
- In total, 24 States charge sales tax on SaaS
The most common economic nexus threshold is $100,000 in revenue and/or 200 transactions (in the previous twelve months).
SaaS providers are highly susceptible to economic nexus triggers of the states with economic nexus when they have a 200 transaction per year threshold.
Example: If you have 17 customers with monthly subscription billing in a state with the 200 transaction per year threshold, that equates to 204 transactions in a given year, which triggers your requirement to collect and file sales tax.
You must always remain on top of whether or not your SaaS (Service) is taxable in the states you are selling, and if it is taxable, be sure to stay atop of the Economic Nexus Thresholds. If you have questions on how Modas can help your business, contact us and we will provide a complimentary consultation and assent on your Service and how you are monitoring your Sales tax in each state you do business.
This is an interesting dilemma for most companies.
As long as you haven’t triggered nexus in a state, you are not legally required to collect and remit sales tax there.
However, companies should heavily consider the position they are putting their customer in by not charging them sales tax. By the letter of the law, a business that purchases a taxable solution must file their own Use Tax return (where applicable) and remit the tax to the state themselves. In other words, because your company chose not to collect and file sales tax on a sale to your customer, you now have put the onus [and frankly hassle] on your customer to take care of it.
And, if the customer doesn’t know to file the Use Tax return in their state, they now have tax liabilities with potential back taxes, penalties and interest. All of this trouble ultimately was caused because your company didn’t want to deal with filing the sales tax.
If the roles were reversed, would you buy from a business that either forced you to file a Use Tax return each month and/or caused you a sales tax audit issue with penalties and interest?
As a seller, you are responsible for collecting and remitting the correct amount to your states Comptroller’s office. If you do not, you can owe any additional tax and may be assessed additional penalties and interest.
Each state has the right to tax the sale where the customer delivery occurs. Therfore, when selling SaaS, companies should collect the tax for the state where the property is delivered to the customer.
If the customer picks up the item at the seller’s location, tax should be collected for the state in which the seller is located.
If the item is shipped to the customer, then tax applies for the delivery state, whether that is the same state where the seller is located or a different state. Sellers should collect sales tax only if they are registered to collect sales tax in that state. You are required to register to collect and remit sales tax based on where you have established nexus. For more information on nexus, see our Nexus 101 page.
If the seller ships items into a state where it doesn’t have nexus, no tax should be charged by the seller. However, please keep in mind, the buyer has the obligation to remit use tax to the state where it uses and consumes the SaaS items if there isn’t an exemption that applies.
Shipping Software products
When selling software as a service (SaaS) and shipping materials, sales tax is usually required to be collected in the state you’re shipping to.
If there’s no ship to state because you’re selling something like Internet accessed software, then companies need to look at where the first beneficial use of the software occurred and use that as the location. If you don’t know where the first beneficial use was, the next step is to look at the billing address of the payment method to determine where your customer is located for tax purposes.
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