Sales tax situsing in action

 

One example of Sales Tax Situsing in the Software as a Service industry is the sale of a license to remotely access software. If a customer in New York, for example, purchases a license to remotely access software from a vendor located in another state, the sale is subject to state and local sales tax in New York, and the tax rate is based on the location from which the customer uses or directs the use of the software.

Another illustrative example is when the sale of prewritten computer software and the services of modifying, altering, updating, or maintaining computer software are subject to sales tax. The situs of the sale is the location from which the purchaser uses or directs the use of the software, not the location of the code embodying the software.

In the retail industry, if a business sells tangible personal property, such as office equipment and supplies, in a locality in New York State with a lower tax rate than the rate where the business uses the items, the business will owe tax for the difference between the rate in the locality of the business location where it uses the items and the rate in the locality where it purchased and took delivery of the items.

Meanwhile, purchases of supplies and materials made by service businesses are generally taxable at the time of purchase because most states treat these as tangible personal property. However, if a service provider uses a computer as a tool to complete a professional service, such as engineering or bookkeeping, the charge to the client is not taxable because the service is not a data processing service.

 

Situs and sales tax: the difference

 

Your sales tax nexus and situs are related concepts in determining the taxation you’re subject to. However, each refers to a different aspect of your taxable activities. In brief, your situs is the specific location of the individual taxable event. Identifying the correct situs will ensure that you’ve charged the correct tax rates to the transaction. 

 

Your sales tax nexus, on the other hand, is better understood as your overall taxable presence within a specific local or state jurisdiction and whether they are obligated to collect sales tax in that jurisdiction in the first place. It looks at factors such as your physical and economic presence and uses that to determine your sales tax responsibility to a state. 

 

Importance of Proper Situsing

 

Regarding direct retail and sales with numerous locations, the situs can influence which sales tax obligations apply to the sale. Determining the proper sales tax situs holds significant value, such as: 

 

  • Compliance: Businesses must adhere to state and local sales tax laws. Determining the correct situs ensures compliance with these regulations.
  • Penalty Avoidance: Failing to collect and remit the accurate sales tax amount can lead to penalties and interest charges. Correctly establishing the sales tax status helps avoid such penalties.
  • Cost Savings: Accurate situs determination prevents businesses from overpaying or underpaying sales tax. This accuracy leads to potential cost savings.
  • Accurate Financial Reporting: The correct sales tax situs is vital for precise financial reporting, including calculating revenue and expenses.

 

The Role of Situsing in Sales Taxation 

 

Ultimately, determining your sales tax situs ensures you comply with the right sales tax obligations relevant to the specific sales. This includes whether you’re using the correct nexus, charging the correct sales tax rate, and actively mitigating any errors, risks, or areas of exposure.

 

For companies in the SaaS industry, determining your sales tax situs can be especially difficult. However, this is merely one of the many uncertainties of navigating US sales tax as a SaaS. 

 

The complex and disjointed nature of SaaS sales tax leaves companies scratching their heads and scrambling to ensure compliance.  There’s no need for concern when you’re prepared for the factors that impact your sales tax nexus as a SaaS company.  Complyt’s expertise in the SaaS field has assisted numerous businesses in navigating the complexities of sales tax compliance. With Complyt by your side, you can ensure that your business is always in compliance with sales tax regulations.