Sales tax requirements for SaaS and subscription sofware
Joan Varrone (CFO)
| Feb 8, 2012I know that electronically delivered software is in most cases exempt from sales tax ( there is a exception in the state of Washington if there is an employee in that state). However, this was based on my work at an enterprise software company a few years back and I wanted to solicit the group regarding the current requirements for enterprise software and understand how cloud based SaaS offereings are treated for sales tax across the US.
Answers
Company: Vail Systems, Inc.
Joan - Hi. This has been a concern of mine over the last 6-12 months...as more and more companies switch from a software and maintenance sale with sales tax implications to a hosted SaaS model. I had asked our tax partner to research 6 states which we have "nexus". For us, it was good news. 5 out of the 6 states don't tax SaaS transactions today. Unfortunately, each state has very specific laws regarding sales tax... In some cases, the rulings are very clear and others not so clear. Given the economic woes of all the states, we must assume that states will continue to find ways to expand the definition of what is taxable from a SaaS perspective. I believe this is going to evolve very quickly...
Ray Scheppach, CFO
Company: BullseyeEvaluation, LLC
I very recently joined an early stage SaaS software company and have identified this as an issue that company management had not addressed. Ray, can you identify the states to which you referred in your comment? By nexus, are you referring to a physical presence in the state - either an office or company representative? Did you consider whether any states would require SaaS users to pay use tax even if the SaaS provider is not required to collect sales tax?
Company:
I want to understand the theory a state might use for taxation. Is it distinguished from a sales of software as it is considered a service.
Company: Masco
Generally SaaS is taxed because there have not been any modifications to the package, whereas the Enterprise packages have had considerable modifications to make them specific to the business.
Company: Bond International Software Inc
This is becoming a larger concern for us as well. We have both SaaS and enterprise software, and in the past only taxed the enterprise licenses. The sales tax was related specifically to the licensing ownership and not modification services. We are beginning to see changes via our client's audits -specifically in TX, and I believe we will see additional states quickly follow suit.
Company: Hisoft Technologies
This topic could get very interesting across international boundaries I suppose as well. Many firms are providing SaaS and the software is maintained by foreign developers on foreign infrastructure (i.e. India). Anyone encounter any unusual tax issues regarding their firm providing SaaS or PaaS hosted in another country but used by firms, particularly SMB's, based in the US?
Company: ToolWatch Corp
One thing I can tell you is there has been a lot of change in this area. We finally gave up and implemented a tax service and they worry about and follow all the laws and rulings. We use Avalara and it couldn't be more cost effective. They even file our returns.
To give you an idea of much this changes CO and NY have both changed their laws or interpreted them differently. We saw CO go from non-taxable (although City of Denver has always been taxable), to taxable, and back to non-taxable in 24 months time. Somewhere along the line NY redefined SAAS and now it is taxable. In TX it is taxable, but not in CA. Basically you can't do the research once and not revisit it often because it changes. Budgetary issues at the states have accelerated this for sure.
Company: CFO Outsourcing Solutions, Inc.
This very same question is a topic with my current client. They are starting a SaaS offering and the company has nexus in all 50 states. The primary issues to resolve is where is the "download" server for the transaction. As mentioned above, Texas is definately taxable.
This may not be appropriate to your situation, but if a SaaS company is selling a product that has price point low enough to be charged monthly on a credit card, then it is advisable to us a 3rd party like Digital River to handle the monthly or annual credit card processing because their tax department is the most up to date on the taxability by U.S. location. Their fee is worth it from a compliance perspective.
J.D. Floyd
Company: Gorilla Expense
Unfortunately this area is constantly changing because taxpayers, States and auditors cannot establish consensus. I believe the trend is going to default towards making SaaS taxable, starting with the cash strapped states.
For now, I would recommend utilizing a tax service provider who specializes in handling SaaS while waiting for the dust to settle. That's what we are doing.