As a SaaS (software as a service) company, you’re familiar with doing business in a fast-evolving digital economy. But what are the sales tax implications of said business? Well, that’s another (very complicated) story. As your SaaS expands its sales across the US, it becomes all the more tricky for your sales tax compliance to keep up.
However, before you can start to worry about managing compliance, you first have to figure out whether your SaaS is considered a taxable product in each relevant jurisdiction. To avoid confusion (and tax penalties), here’s what you need to know about collecting sales tax as a SaaS.
An overview of sales taxes for SaaS
When it comes to US sales tax, you’re immediately thrown into the deep end. Even the first step of the process, trying to understand if you’re subject to sales tax or not, is rife with complexities. Why? Well, it all boils down to the lack of standardization across the US – especially regarding SaaS.
In the US, a SaaS product is often taxed differently than a typical digital good. Therefore, you must confirm whether your specific SaaS falls into a taxable product category.
This starts with knowing the three types of software products generally considered taxable in the US. Although different tax treatments apply, the jurisdictions depend on these main factors:
- Physical software (software that is delivered via a physical medium)
- Downloadable software or applications
- Cloud-based SaaS or software
If your SaaS falls into the above categories and sells to US-based customers, you could be liable for sales tax in at least 21 states.
Next? Determining your responsibilities and obligations.
How to determine your Saas sales tax obligations
Each SaaS is responsible for understanding its specific obligations regarding sales tax. This starts with determining whether or not your SaaS is taxable in a particular state. After you’ve confirmed your SaaS taxability, the next step is to track and monitor your nexus. Your nexus is also known as your sales tax connection to a specific state, and once you’ve triggered a nexus, you’re liable for sales tax and everything that comes along with it.
If you’ve established your SaaS is, in fact, taxable in a state and you’ve confirmed your nexus, be careful not to start charging sales tax right away. Just because you’re selling a SaaS product and it’s taxable in a certain state doesn’t mean you need to register for sales tax just yet. In addition to your product taxability, your liability also depends on how much you sell, your selling methods, and where your business is based.
B2B vs. B2C sales impact the sales tax process
Very few organizations are familiar with all the different factors that could potentially influence the SaaS sales tax process. The type of sale is one factor that is rarely considered yet often leads to non-compliance. In most states, B2C (business-to-client) transactions are taxable in some states (Connecticut and Ohio). However, B2B (business-to-business) SaaS transactions are more widely considered taxable. Be sure to confirm which states differentiate between transaction types and how it affects the taxable sales and applicable rates per jurisdiction.
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