SaaS – Think you’re not subject to Sales Tax? Think again…4 Part Series

Thanks to contributing author: Steven Claflin, Manager SALT (State and Local Tax)

Sales tax compliance is inherently complicated for any seller because of the unique sourcing rules, different nexus thresholds, difficult taxability determinations, and multiple layers of taxation.  However, when it comes to the Technology Industry, sales tax compliance is perhaps the most complex.  The purpose of this series is to highlight the intricacies associated with the Technology industry that led to this complexity as well as discuss why sellers should be aware of these risk issues.

There are 4 areas that need to evaluated to determine your exposure to sales tax:

1.) Nexus – a Company connection to a state which may subject a company to a filing requirement
2.) Sourcing of Sales – if Nexus is determined to exist – how are sales sourced to the states for apportionment purposes?
3.) Taxability – are the sales of software and SaaS licenses even taxable – not all states are the same.
4.) Compliance – none of the above really matters if we don’t collect, remit and file the required sales tax returns.

So why is this important? Sales tax is actually not a liability of the Company, it’s a pass-through tax intended to be on your buyers. However, when a seller doesn’t collect sales tax on a taxable transaction, the seller and buyer are jointly and severally liable for the tax. In other words, if you as the seller are audited and didn’t collect the proper tax, that now becomes your liability. This can be most acutely felt during Due Diligence when trying to sell the Company or raise additional capital. 

These may be separate sections but should be considered together.

Next up: Nexus!