Sales tax on digital versions of products and services, and sourcing the receipts from those sales, is one ways state collect from out-of-state sellers. Increasingly, this tax is extending to Software as a Service (SaaS). How states tax, when, and where impacts multistate companies dealing with remote digital software services as both a seller and a buyer.
SaaS definitions and the way its taxed varies widely among states. While some states tax SaaS as tangible personal property, others see it as a service, making taxability conditional on current tax policy. Assuming that your SaaS (PaaS, IaaS, or any other “as a service” digital good) is a service and therefore not taxable would do your company a great disservice as more than 15 states will tax SaaS.
These nuanced differences across jurisdictions complicate sales tax compliance. Changing and conflicting state laws and policy regimes add to the confusion, as do varying jurisdictional differences in states that do not have standardized definitions, rates, and rules. There are further items to think about that could change your tax consequence, such as service location, support, maintenance and implementation services.
Taxpayers relying on automated solutions to generate the right taxability decision could be disappointed; when taxability isn’t clear, the automated solution may not generate the right answer. Taxability software often will result in the most conservative tax decision when it comes to taxability answers. It’s therefore important to understand the laws and their applicability (e.g do you meet the 5-prong test in Illinois).
Sometimes individual tax decisions must be made based on unclear or conflicting tax guidance. That’s when experience makes the difference. We’re here to help you make those tricky sales and use tax decisions.
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