If you’re a software as a service (SaaS) business owner, sales tax can be a major source of frustration. Here are some simple steps you can take to stay compliant.
SaaS businesses continue to be one of the fastest growing industries in America. These companies typically have a bigger digital footprint than a conventional brick and mortar business. If you offer digital goods or software as a service (SaaS) it may be time to upgrade your compliance practices.
One of the biggest grievances SaaS business owners have when it comes to sales tax is how much the definition of a software product varies among the states across the country. Not only do the states vary but the local jurisdictions in each state can also vary. To add to the complexity, the local tax regulations change often, so it can be dizzying to keep up. Most states tax tangible personal property, and do not tax services. However, many states are adopting legislation that tax some services, and the list of services and/or the items defined under taxable services seems to grow to a point where it seems like all services are taxable. Some states impose sales tax on SaaS the same way they tax tangible software, some tax it directly as it own defined service offering, and some states tax it under a different taxable service category like data processing service or information services. Add on the varying tax rates and thresholds and it all can become quite overwhelming to try to iron out. Here are 4 steps to get and remain compliant as a SaaS business.
The answer on how to get compliant starts with knowing where you have a responsibility to collect tax, and you always start with nexus. You must go through, state-by-state, and figure out if you meet thresholds that establish nexus (physical or economic), and then understand if your products and services are taxable in those states.
When digital goods and services became more and more relevant, it threw tax authorities for a loop. Each state seemed to handle this situation a little differently. For example, Washington built specific guidelines on digital goods and services in their tax laws1. Texas, on the other hand, relied on existing laws and ended up grouping digital goods in with already taxable services (and they even use a different tax base for imposing the tax). And then there are the states that haven’t updated their laws at all which leaves the SaaS business owners wondering what the best move is.
This makes it quite difficult to decipher what is taxable and what’s not. Just like knowing your responsibility, you have to go through, state-by-state, and figure out if your products and services are taxable in those states.
From there, if you determine you have nexus and SaaS is taxable in a given state, you’ll need to register to collect sales tax, pay any owed taxes and configure your billing platform to start collecting taxes. But before you get registered, you should try to take advantage of sales tax refunds, marketplace facilitator laws, and other exemptions that can reduce your total liability.
If you are feeling overwhelmed, we understand. Sales tax on digital goods and SaaS can be a burden, especially if you haven’t given it much thought yet. We get it. You’ve been focused on running your successful business and sales tax hasn’t been on the forefront.
Getting compliant is a tough pill to swallow if you’ve never had to deal with it – but the worst thing you can do for your business is ignore it. It ultimately boils down to your unique situation and the context in which you sell your digital goods or software. Getting sales tax compliant isn’t a one-size-fits-all solution. That’s why you need to talk to a sales tax expert.
If you offer digital goods or SaaS and need to get sales tax compliant we’re here to help. Sign up for our no-strings-attached ‘What’s Next Call’ to find out next steps your company can take. Peace of mind is a phone call away.