Software Executive Magazine

February/March 2018

Software Executive magazine helps software executives grow their businesses by showcasing the business best practices of our readers, executives from established and innovative software companies.

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Sales Tax For SaaS: An Update A state-by-state breakdown of SaaS sales tax status. S T E V E S E H Y CPA, MBA, Fractional CFO for SaaS companies C H R I S L I V I N G S T O N Director of Product and Operations, Vertex Cloud J E N N I F E R D U N N Chief of Content, TaxJar Some states have enacted Remote Sellers laws that create economic nexus by just selling in the state. How- ever, many of the states have a minimum sales amount in the state before these rules apply. Also, instead of col- lecting tax, some of these laws require you to send your customers and the state a report indicating that sales tax was not charged, and therefore, the customer must pay the use tax. The states where SaaS is impacted by this include: Alabama ($250k prior calendar year), Cal- ifornia ($1 million, prior 12 months), Colorado ($100k prior year - use tax notification to customer and state), Louisiana ($50k current year, send an end-of-year use tax notification to customer and state), New Jersey ($10k prior four quarters), New York ($10k prior four quarters), Pennsylvania ($10k prior 12 months), and Washington ($10k). PROPOSED FEDERAL LEGISLATION While sales tax is currently governed at the state level, several federal bills have been introduced in Congress over the past few years that would overhaul the U.S. sales tax system. These include: ▶ The Marketplace Fairness Act (MFA) — This bill got the most traction, passing in the Senate but expiring CURRENT STATUS – TAXABILITY BY STATE We have assembled a table indicating the current sta- tus of taxability in each state. Note: The definition of SaaS is different from state to state. You will have to research to confirm that your business falls within the definition that we have used. Some states still identify SaaS as application service providers (ASP). In a SaaS/ ASP model of delivery, software applications are deliv- ered as services, rather than products, as in traditional licensing models. Application service providers host and maintain software for the end user, who then ac- cesses them over the internet. CURRENT STATUS – NEXUS Nexus is the term indicating whether or not you need to collect and remit the sales tax for a state. It means that you have sufficient contact with a state that you fall within their tax laws. The general rule is that if you have an employee or a facility in a state, you have nexus with that state. Note: If you have a remote sales force, one employee in a state is enough to trigger nexus. Or, you could have a main office in Chicago, IL, for example, that employs an Indiana resident, so you will need to review your payroll register. States have been rapidly changing the sales tax environment for internet businesses, including Software-as-a-Service (SaaS) companies. The changes include changing definitions of SaaS, changing the taxability of SaaS, and changing the requirements for determining for which states a company needs to collect sales tax. Since none of this contributes to company revenue or income, the best case scenario is break-even, and the worst case scenario includes paying sales tax to a state (up to 10 percent of revenue) when you didn't collect it, and penalties as well. While larger companies may have a team working on this, small to midsize SaaS companies are struggling to deal with this issue. SCALING & GROWING framework By S. Sehy & C. Livingston & J. Dunn SALES TAX FOR SAAS: AN UPDATE SOFTWAREEXECUTIVEMAG.COM FEBRUARY/MARCH 2018 32

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