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Sales Tax On SaaS Subscriptions Sofware

sales tax on saas subscriptions<br />
I 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

Ray Scheppach
Title: Chief Financial Officer
Company: Vail Systems, Inc.
(Chief Financial Officer , 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

Sarah Jackson
Title: Associate Editor
Company: Proformative
(Associate Editor, Proformative) |

Hi Joan,

Get a free copy of this white paper:
"The Definitive Guide to Sales and Use Tax"
https://www.proformative.com/whitepapers/definitive-guide-sales-use-tax

I also found this free white paper titled "Managing Revenue In The Subscription Economy" which might help:

https://www.proformative.com/whitepapers/managing-revenue-subscription-economy-0

I hope it helps. Enjoy!

Best... Sarah

Anonymous
(Owner) |

Are there any lists of states that charge sales taxes on SaaS and Enterprise Software Packages?

Tony Maresca
Title: CFO
Company: BullseyeEngagement LLC
(CFO, BullseyeEngagement 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?

Topic Expert
Joan Varrone
Title: CFO
Company: Cloud Cruiser
LinkedIn Profile
(CFO, Cloud Cruiser) |

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.

Cherie Van Blaircum
Title: Manager SUT
Company: Masco
(Manager SUT, Masco) |

Generally, sales tax on SaaS subscriptions 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.

Annette Cork
Title: Senior Accountant
Company: Bond International Software Inc
(Senior Accountant, 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.

Topic Expert
Mark Pieper
Title: Director, SCS Finance
Company: Premiere Healthcare Alliance
(Director, SCS Finance, Premiere Healthcare Alliance) |

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?

Dan Jebens
Title: CFO
Company: ToolWatch Corp
(CFO, 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.

Topic Expert
J.D. Floyd
Title: Owner, CFO
Company: CFO Outsourcing Solutions, Inc.
(Owner, CFO, 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

CV Sudarshan
Title: Sr. Executive
Company: Gorilla Expense
(Sr. Executive, 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.

Laxmi Khatiwada
Title: CFO
Company: Simplify360
(CFO, Simplify360) |

I am also having same issue to bill the clients in different states. We provide SAAS based monthly subscription package all over the world including all American States. Our office is based in American States of Georgia. I was searching some consolidated tax table for all the states. Any help in this matter will be appreciated.

-LaxmaN

Anonymous
(Sr. Revenue Accountant) |

As Dan mentioned, the tax rules are ever changing and what is non-taxable now may later be taxable. I am also a 2x user of Avalara and highly recommend an automated sales tax solution. It is a low cost solution for piece of mind. Also, if you purchase their Returns filing service, they will respond to any state notices that you receive on your behalf.

We researched 29 states and these are the states that were determined to be taxable for SaaS as of 03/14- AZ, CT (1%), DC, HI, IN, MA, MI, MN, NY, OH, PA, RI, TX, UT, WA.

The added complexity as someone else mentioned is determining in which state the software is downloaded. The server may reside in one state, but some large customers want to pay tax apportioned by where the employees are located that are using the software, which could be multiple states.

Nicolas Vandenberghe
Title: co-founder & President
Company: Chilli Pepper
(co-founder & President, Chilli Pepper) |

Hi, you list 15 states as taxable, is it only in the case where the SaaS provider has established nexus in these states or in any case? Thanks for the clarification!

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

This is a follow-up on one of the questions:

What if the the servers were outside the US

What if the company and servers were outside the US and does it change just because a European (for example) may have sales individuals in the US but no corporate presence?

Anonymous
(Partner) |

For all of the cases mentioned above, am I correct in thinking that the tax implication is only relevant if nexus has been established in that area? For example, assume NY charges sales tax for SaaS, my company is located in AL, which doesn't tax SaaS sales, and I don't have nexus in NY. If I implement an online SaaS solution for a client in NY, is NY sales tax up for consideration or irrelevant?

Albert Alvarez
Title: CFO
Company: Cigar City Brewing, LLC
(CFO, Cigar City Brewing, LLC) |

From my understanding, your client in NY would be liable to pay USE tax for your services. But it is THEIR responsibility to report this to NYS.

Shawn parandeh
Title: Managing Director
Company: SmartOps
(Managing Director, SmartOps) |

Here is a good summary of SaaS and sales tax, published through AICPA, by J. Jensen, CPA and A. Parfiryeva, CPA on June 1st, 2013 "Taxation of the Cloud Still Hazy, an article from the AICPA’s Tax Adviser magazine"

http://www.aicpa.org/publications/taxadviser/2013/june/pages/salt_june2013.aspx

Anonymous
(Controller) |

Hi, sales tax has grown ever more complex and the rules of the game keep changing. I am currently implementing a sales tax automation compliance solution with Avalara and I highly recommend it. They make their pricing/model much like ADP (ie a no-brainer to outsource this). Provided you properly map your products/items/revenue to a correct revenue description they will determine if item is taxable or not real-time. And, they will also do this on a state by state basis and help you with complicated states such as CO, TX or CA whereby it depends on the actual location. And, they do this based on a geo-search. I am having them do this for my company (fast growing start-up which went from 1 state in January to 20 this month) ... they will be calculating my sales tax, compiling data and filing all of my returns as well. Of course, they do more (or less) depending on your needs and they are integrated with many GL and billing packages.

Much more efficient than having the SALT team on your accounting firm do research/leg work at much less the cost.

Mark Symonds
Title: Principal Consultant
Company: TruWin Partners (sole proprietor)
(Principal Consultant, TruWin Partners (sole proprietor)) |

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 not 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?

Sandra Ehn
Title: Sr. Revenue Accountant
Company: VersionOne
(Sr. Revenue Accountant, VersionOne) |

@Nicolas Vandenberghe - Yes, I am assuming Taxable if the company has nexus in those states. With further research in court cases, I am now not charging tax for SaaS customers in MI, MN. I would appreciate further input for these 2 states.

In using Avalara tax codes, I struggle as to whether to consider SaaS Software or a Service.

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