This article is aimed at providing the reader with general strategies in verifying software taxability. It is not aimed at providing taxability result on software
because there are already many websites with this information. One can simply search the internet on "Sales tax on SAAS" or "Sales tax on Software"
and many third party websites
may provide the taxability info. However it is suggested to take such taxability information "with a grain of salt" because there may be various conditions that
might change the taxability result.
1) In general, Software has a few different types and delivery methods. Software can be a "canned or pre-written" in which customers receive the same
product or service, or it can be "custom" made based on customer's specific requirements. Software can be delivered on a physical media, downloaded,
or accessed online as an information service (Software as a Service or SAAS). Sales tax treatment may be different for the type of software and/or type of delivery. Thus the software
provider needs to know what and how its software is being sold to customers.
2) Once you have categorized your software per step 1, then you can prepare a one year sales report by state, and sort the table by descending order
of gross sales. This provides a list of the states with highest sales on top.
3) Starting from the top of the list (highest sales = highest risks), you might determine if you have nexus in each state. Nexus generally involves physical nexus (employees,
office or other physical locations, owned or rented warehouse, sales reps, etc), or economic nexus which depends on sales thresholds such as ($100,000/year or 200 sales/year).
There is ample of online economic nexus info. You might search the internet for "sales tax economic nexus", and compile the info from several websites.
You can also call each state sales tax phone number
to confirm because the thresholds might change from time to time.
4) For the states where you have no nexus, skip them. For the states where you have nexus, you can search the internet for taxability info such as using the keywords "Sales tax on software" or "Sales tax on SAAS",
and compare the results from several websites (third party results might be different, right or wrong).
Add the taxability info from the third party websites on the list in step 2 for each state.
5) For each state where you have nexus, call the sales tax phone numbers
and ask the phone agent if they have a
taxability expert on software to talk with. Describe your specific scenario, ask that expert for the taxability answer, AND to send you supporting documents.
6) The above is a small investment of your time, which can save you $thousands in professional consulting services and can minimize sales tax audit assessment risks. Given you or your staff has verified
the information for yourself, you might have a good comfort level on the internal taxability chart you have just built.
7) Once you have determined the states in which to apply sales tax, you can implement sales tax collection in your ERP. This can be done by
integrating the ERP with a sales tax rates software, or via a subscription of a monthly sales tax rates flat file. Search the internet for "Sales Tax Rates subscription", "sales tax rates file" and plenty
of software suppliers should appear.
8) According to our clients, sales tax software is effective for real time tax calculations, but not ideal for filing returns, due to state bureaucracy.
In addition, most software providers file returns via a middleman system instead of directly with the states. If there is any issue, the state agent might not be able to support middleman systems
and might send you back to the software provider. Any issue might be caused by the software provider, the middleman, the state, you, or no one.
Until the cause is known, meanwhile the penalties and interest keep coming in which is not ideal if your tax is not small. We provide "managed filing services"
which includes registration, data processing, filing, paying, reading letters/emails, and resolving state notices.
We manage thousands of returns per month very efficiently. Thus most clients only send us their report, 1 or 2 emails/month and have time to focus on other work.
Next, other risks may arise during the sale of your software. For example, if you are providing SAAS, it might be possible that some
customers might try to claim that their users are in states that exempt sales tax on SAAS, which might create risks for you. This is a complex issue, and we have devised a
strategic plan for our SAAS clients to manage this aspect.
please contact our sales tax consultant to save cost and time.