How New Sales Taxes Effect SaaS Companies
Until recently, businesses selling Software-as-a-Service (SaaS) products were accustomed to making relatively simple determinations whether to collect sales tax. Collect sales tax where you have a physical presence and SaaS is taxable. However, the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. handed down in June 2018, has changed all of that.
After the Wayfair ruling, states can now obligate remote sellers of SaaS products to collect sales tax on their sales. SaaS sellers feel like they now have to be sales tax experts to know where they have nexus and whether their product is taxed.
The key is to focus on each states economic nexus threshold. Each state will have its own threshold. A few state examples are below:
Once these thresholds are exceeded, a tax collection obligation is automatically imposed on remote sellers, even if they do not have a physical presence in-state.
- South Dakota’s collection obligation kicks in after $100,000 of in-state sales or 200 of in-state transactions per year.
- California collection obligation kicks in after $500,000 and $100,000 of in-state sales (No transaction threshold)
- Massachusetts collection obligation kicks in after $500,000 and $100,000 of in-state sales (No transaction threshold)
SaaS businesses must now know all the different economic thresholds, and know when they are exceeded, so they can timely comply with new sets of tax rules. Taxability of your product may come down to a state tax auditor’s own interpretation of the facts surrounding your product and how their sales tax laws should be applied. You must also track current state laws because the taxation of SaaS products can change.
Here are few states where SaaS Products are exempt and when:
- Beginning in July 2018, Indiana’s new law exempted sales, leases and licenses of SaaS products.
- Sales of SaaS products in Vermont became exempt starting July 1, 2005.
- Louisiana’s Department of Revenue repealed their revenue ruling that a charge for software accessed remotely is taxable.
In an attempt to adapt to today’s modern economy, many states have been forced to adapt their nexus standards and their taxation of SaaS products to maintain or replace sales tax revenue lost from disappearing brick-and-mortar locations. State lawmakers are creatively characterizing, or re-characterizing, SaaS as taxable sales of tangible software or data processing services. As an incentive to bring jobs into their state, legislators have exempted products and services from sales tax. Some cynics see changing SaaS laws as a given, requiring periodic monitoring to implement changes timely.
Overlooking collection obligations and not charging tax on sales of your SaaS product could create unpaid tax liabilities that will never go away and “responsible persons” in your business could be held personally liable for the unpaid sales taxes. Notices assessing a liability on SaaS sales will likely include penalties and interest on top of the unpaid taxes. With sales tax rates over 10% in some places, penalties that could reach 25% of the unpaid tax, and interest assessments equal to the tax owed if the sales tax remains unpaid long enough, you can no longer pin your financial hope on not getting caught.
Stay Attentive and Seek a CPA if necessary.