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Saas Taxation

I understand that some states find Saas billable and some not, but most are trending that way. My question is a practical one for an enterprise software company. In the following example how is the tax liability calculated? Enterprise software is provisioned and sold via a single subscription to a company headquartered in a state where subscription software is taxable. Some modules are used only at corporate while others are accessed by company locations in say 20 states, 12 of which tax subscription software. Only one invoice is sent. How does one determine liability to which states?

Answers

Richard Schultz
Title: CFO
Company: SoMedia Networks
LinkedIn Profile
(CFO , SoMedia Networks ) |

My experience here is about 10 years old, so this may have changed. However, back when I handled state sales tax for an enterprise software company, we assigned the full tax burden to the purchasing entity. For example, if the client had locations in Atlanta and San Francisco, and was purchasing all the licenses in San Francisco, we applied the San Francisco state/county/city taxes. If the Atlanta division later bought further licenses under their own control, we would apply the taxes for Atlanta. If the further licenses were intended to be used in Atlanta, but purchased in San Francisco, we would invoice and tax based on San Francisco rates.

The logic is simple, and follows most accounting logic - we account for what we know, not what we are told. Just because the client says they are going to deploy x licenses in Atlanta and y in San Francisco, that doesn't mean they will. Heck, some might go to Alaska instead (I've seen it happen). Since we can't control where the licenses end up, we can't tax them.

In your situation, how can you tell which licenses end up where? If a user is at a non-taxable jurisdiction at the time of sale, but is then transferred to a taxable jurisdiction prior to rollout in that jurisdiction, is it reasonable to handle the tax on your end? Your responsibility is to collect tax on the purchase at the point of sale - one invoice, one tax, one tax rate. The client may have use tax issues upon deployment - but that's their burden.

At least, that's how we tackled it 10 years ago, and it worked ok. I'd be interested to hear how this works out for you.

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