Is Wayfair Simplification On The Horizon?
If you're a business owner, accountant or involved in the tax world in any way, you've undoubtedly been made aware of the Wayfair decision.
In short, that decision, which said that South Dakota's economic nexus law was constitutional and opened the door for other states to do the same, effectively made it easier for companies to create nexus in a state for sales tax purposes, thus creating a collecting and filing responsibility.
Over three years later and every single state that has a general sales tax has implemented some form of Wayfair-related legislation, whether economic nexus or marketplace facilitation. However, because each state has the freedom to do so independently, tax rates and the triggers for these Wayfair laws vary wildly. For businesses, this lack of cohesion has created a tax burden that, for some, is nearly unbearable.
As previously mentioned, much of the complexity regarding Wayfair laws comes from the lack of uniformity on a national scale. However, additional complexity can be found in the application of this legislation, with many states also utilizing different components for measurement (gross sales vs. taxable sales) for Wayfair thresholds, on top of thresholds that differ state to state.
The other problem comes from the catch-22 that Wayfair legislation has created for online retailers. Companies need a certain amount of sales to keep making a profit, but if they do too much business in certain states, they may trigger economic nexus, resulting in additional money spent to stay tax compliant. To stay ahead of these costs, retailers need to do more business, but that may result in additional tax liabilities.
Previously innocuous things, like Black Friday, surges in online shopping and tax holidays, have suddenly become hidden traps for online retailers. A sudden surge in business can get these retailers caught in the sticky web of economic nexus and leave them unprepared for the tax consequences that follow.
The final hold-out state enacted Wayfair-related legislation earlier this year. As a result, remote retailers face economic nexus, marketplace facilitation or both in 46 states, plus Washington D.C. and Puerto Rico.
Ever since the Wayfair decision, various entities have proposed simplification solutions but there are more calls now than ever thanks to the pervasiveness of Wayfair laws.
The Streamlined Sales Tax Project and the resulting Streamlined Sales and Use Tax Agreement are two such efforts and actually pre-date the Wayfair decision. However, while the agreement proved popular in certain circles, only about half of states have adopted it since its implementation, limiting its effectiveness in regards to the Wayfair situation.
Companies like Etsy, which recently asked sellers on its platform to join it in advocating for a federal solution, have also spoken out regarding the increased burden Wayfair creation.
Over the last three years, some states, including Alabama, Louisiana and Texas have taken steps to simplify tax remittance for remote sellers. Several have also adjusted economic nexus thresholds to provide additional safe harbor for smaller business more heavily impacted by Wayfair legislation. (That said, other states have widened the net instead.)
Legislative bodies have also reviewed Wayfair legislation, with many acknowledging the complication these laws create but stopping short of proposing a specific solution.
However, despite all the discussion, there remains no overarching solution to the complexity of Wayfair legislation as of now. As states continue to feel the effects of the pandemic and look to the taxation of online retail as a source of income, it's unlikely many will want to make concessions on their own Wayfair-related legislation.
While these conversations continue, retailers will have to deal with the ramifications. To stay tax compliant, businesses need to stay proactive about their tax liabilities and seek professional assistance if the burden becomes too great to bear on their own.
We answer questions around this topic daily - so if you call us to ask questions, you're in good company!
If you have questions regarding your online sales tax liabilities, or any other state-related tax questions, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
Avoiding Common Exemption Certificate Mistakes
If you’re manufacturer, wholesaler, or a reseller, you know that collecting resale and tax exemption certificates is par for the course. Like most things tax related though, it’s often not as simple as collecting a document and calling it a day. Rules for collecting certificates can vary based on the state, products involved, business relationships and a variety of other factors. If that wasn’t hard enough, the rules themselves are prone to frequent regulatory changes.
One of the most common mistakes that businesses make when collecting exemption certificates is not collecting the right resale or tax exemption form. To know which form must be collected, a business must be familiar with a variety of rules pertaining to sales tax nexus and compliance. For instance, if you’re a business based in Rhode Island shipping goods for resale to your customer across state lines into Massachusetts, your customer must provide you with a valid Massachusetts Resale Certificate in order to substantiate that the sale is indeed tax exempt. This is due to the nature that sales tax rules for transactions are typically based on the ship-to-state. If your customer were to provide you with a Rhode Island Resale Certificate, and you accept this certificate without charging sales tax and forget to remediate this, you may find your business taking on an expensive liability during your next sales tax audit.
What To Know About Intercompany Service Receipts In Washington
Washington state is known for its evergreen forests, beautiful mountains and for being the home of Starbucks. That said, for remote retailers, it should also be known as a state with several unique tax situations, one of which is its treatment of intercompany service receipts.
In general, the Washington Department of Revenue (DOR) takes a fairly aggressive stance in regards to the taxation of remote companies providing services to customers within the state.
However, companies have several avenues that could provide potential relief for these tax burdens.
As previously mentioned, Washington state is aggressive in its approach to the taxation of remote companies. In regards to economic nexus, Washington was among the first to enact it, with a version of it being implemented on Oct. 1, 2018. The state also enforces economic nexus for its business and occupation (B&O) tax on gross receipts.
Washington state is also proactive when it comes to the taxation of technology products, which makes sense given the number of technology companies that have headquarters within the state, including giants such as Microsoft, Amazon and Nintendo of America. In short, all digital products are taxable. Prewritten computer software that is electronically downloaded is taxable. However, custom computer software that is electronically downloaded is exempt. Lastly, Software as a Service (SaaS) is also taxable.
When it comes to intercompany services receipts, the location of the main beneficiary of the services is a primary factor in determining the sourcing of those receipts, as opposed to where the services are performed. According to ReedSmith, businesses that perform support or management services, such as human resources or accounting, for an affiliate that is a wholesaler or retailer of tangible personal property often get caught by Washington's nexus web.
Specifically, "Both [companies] are based outside Washington and may have little or no property or payroll in the state. [The affiliate and operating company] makes sales nationwide and pays B&O tax, while [the service provider] has no filing history in Washington prior to being audited by the [DOR]. On audit, the Department sources a portion of [the service provider's] intercompany receipts from [the affiliate] to Washington, resulting in B&O tax liability for [the service provider]."
According the ReedSmith, a recent Washington state Court of Appeals decision on LendingTree, LLC v. Department of Revenue provides guidance in regards to these situations. In the opinion, the court determined, "the benefit of LendingTree's services were received at the location where its customers were physically located, not at the location of its customers' market (the borrower location)."
Depending on how the sourcing of receipts is determined, the B&O tax liabilities of the provided services can be mitigated, providing relief to companies providing services and with nexus in Washington state.
If you have questions regarding your online sales tax liabilities in Washington, or any other state, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
Focus on West Virginia
Known for its mountainous landscape and rolling hills, this month we travel north to West Virginia. The state has a rich history and is embedded in the Appalachian Mountains.
West Virginia is known for a wide range of outdoor recreational activities, such as skiing, whitewater rafting, fishing, hiking, backpacking, mountain biking and hunting. The state offers many golf courses as well.
It is also one of the most densely Karstic areas in the world, making it a choice area for recreational caving and scientific research. Karstic topography is a landscape formed from the dissolution of soluble rocks such as limestone, dolomite, and gypsum. It is characterized by underground drainage systems with sinkholes and caves. These underground hydrology systems contribute to much of the state’s cool trout waters.
How The Paycheck Protection Plan Is Impacting Businesses One Year Later
For companies in many industries, staying in business throughout 2020 was a struggle. It meant constantly adapting to new challenges, working harder than ever to just stay afloat and strategically taking advantage of state and federal relief efforts, like the Paycheck Protection Program (PPP), wherever possible.
As a small business, we felt those struggles ourselves, and even as life starts to go back to 'normal,' we understand that the financial concerns of the last year are not going to just magically disappear.
Depending on what relief was utilized, many business owners are now considering their best strategy for repayment. In this blog, we'll discuss your options and help you decide what's best for your company.
The CARES Act, signed into law by former President Trump on March 27, 2020, initially set aside $349 billion in COVID-19 relief funds for small businesses through the PPP. Additional rounds of funding were later passed by Congress, with the final applications for the program accepted May 31, 2021.
Through the program, certain businesses could apply for and receive forgivable loans for payroll and other qualified expenses.
Loan amounts are applicable for forgiveness "if all retention criteria are met, and the funds are used for eligible expenses," according to the U.S. Small Business Association.
More specifically, eligible borrowers qualify for full loan forgiveness if during the 8- to 24-week covered period:
- Employee and compensation levels were maintained
- The loan proceeds were spent on payroll costs and other eligible expenses; and
- At least 60% of the proceeds were spent on payroll costs
Businesses who utilized a second draw PPP loan are eligible for forgiveness under the same terms as their first PPP loan.
From a federal tax perspective, that forgiveness amount isn't reported as taxable income and the qualified expenses related to the loan are also deductible, which was a major benefit of the PPP loans. However, as you'll see below, not all states are in conformity.
When it comes to forgiveness, borrowers can apply once all loan proceeds have been utilized that the borrower is requesting forgiveness for. From that point forward, business owners can apply for forgiveness any time up to the maturity date of the loan. However, "if borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender."
The application process for forgiveness can be found on the SBA website and requires certain documentation to be provided, including payroll and non-payroll records.
That said, the biggest question that many business owners are now facing is whether they should apply for forgiveness at all.
Another federal relief program, the Employee Retention Credit (ERC), is offered to companies that, within specific periods:
- Were forced to shut down the operation of their business because of governmental orders limiting "commerce, travel or group meetings due to COVID-19."
OR
- Saw a decline of gross receipts in a specified calendar quarter that were less than 80% (50% in 2020) of the gross receipts in the same calendar quarter of 2019.
The program allows eligible businesses to claim a tax credit equal to 70% of the qualified wages they paid to employees for the period they are applying for.
While businesses were not initially allowed to utilize both programs, later legislation has allowed employers that received PPP loans to also claim the ERC for "qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan."
What this means is that if qualified businesses choose to defer forgiveness and apply for the ERC, they could see overall greater savings and receive more funds in the long run, in part due to the low interest rates on PPP loans.
Businesses that have yet to take advantage of the credit for 2020 or 2021 have until April 15, 2025 to amend prior payroll tax returns, but the clock is ticking for PPP forgiveness applications.
That all said, it's also important to factor in state responses to federal treatment of COVID-19 relief. Depending on the state, they may or may not treat PPP funds as taxable income.
A recent survey conducted by Bloomberg Tax & Accounting and reported on by CPA Practice Advisor found that 29 states indicated they will follow federal treatment of PPP loans, under 1160(i) of the CARES Act.
Our own home state of California has only partially conformed to the federal legislation on forgiveness of income and deductibility of expenses related to PPP loans. As explained in this article by Grant Thornton, businesses have to meet the qualifications of an eligible business. To be eligible to deduct the expenses, a taxpayer must have experienced a 25% or greater reduction in quarterly gross receipts for the first, second or third quarters of 2020 as compared to the same quarter of 2019.
As you decide the best path forward for your business, it's important to consider your own state's treatment of PPP funds. If you have questions regarding your loan, the SBA offers resources on its website to help clarify any concerns you have regarding it or other programs through the CARES Act.
If you have specific questions about state tax matters, please contact us today and we can clarify any aspects you're trying to navigate.
Wayfair Three Years Later- What Has Changed?
It’s hard to believe that it has been three years since the landmark decision in the Supreme Court Case of South Dakota v. Wayfair (2018) that changed the sales tax landscape. The high court’s decision was that South Dakota’s economic nexus law was constitutional and that the state could require companies who met certain sales thresholds to collect and remit sales tax on sales to South Dakota customers, even if the company had no physical presence in the state. The decision effectively added another means that states can create nexus in a state for sales tax purposes.
The Supreme Court’s ruling did not automatically make this the law of the land for all 50 states. It was a South Dakota case, so the ruling just applied to South Dakota. However, since then, states have been jumping on the economic nexus bandwagon and enacting laws similar to those of South Dakota. States have long been searching for new ways to bring revenue into their state and the Wayfair case gave them a long-awaited opportunity to do so.
Focus on Georgia
The last of the original thirteen colonies is Georgia, the Peach State. Georgia is also known as the Empire State of the South. The state’s terrain spans coastal beaches, farmland and mountains.
There are also many points of interest that attract visitors to Georgia. In Atlanta, there are the World of Coca-Cola and the Georgia Aquarium. Stone Mountain, just north of Atlanta, is Georgia’s most popular attraction, receiving over 4 million visitors per year. Callaway Gardens, in western Georgia, is a family resort. The area is also popular with golfers.
The Golden Isles are a string of barrier islands off the Atlantic Coast of Georgia near Brunswick that include beaches, golf courses and the Cumberland Island National Seashore.
Sports play a large role in Georgia. In professional sports, the Georgia Dome in Atlanta has hosted a few Superbowls, while also supporting college championships for basketball and football. Georgia has teams in three of the major professional arenas of basketball, football and baseball. The state capital was home to the 1996 Olympic Games. The city of Augusta is known for hosting the Masters golf tournament each year.
Business Climate
Atlanta, the capital of Georgia, is a global city, an important node in the global economic system. It is also home to many large companies. There are 17 Fortune 500 companies and 26 Fortune 1000 companies with headquarters in Georgia, including Home Depot, UPS, Coca-Cola, TSYS, Delta Air Lines, Aflac, Southern Company, Anthem, Inc., and Sun Trust Banks. Georgia is home to Hartsfield-Jackson Atlanta International Airport, one of the world’s busiest airports, measured by both aircraft traffic and passenger traffic.
Aside from the metropolitan centers in the state, farms paint the landscape of the southern part of the state. They produce peanuts, corn, and soybeans. Georgia’s agricultural outputs include poultry and eggs, pecans, peaches, cotton, peanuts, rye, cattle, hogs, dairy products, turfgrass, timber (particularly pine trees), tobacco and vegetables.
Major products in the mineral industry include a variety of clays, stones, sands and the clay palygorskite, known as attapulgite.
As noted in the introduction, tourism also plays a role in Georgia’s economy. Tourists are attracted to the rich history of Georgia from its origins as a colony and because of some great leaders who have shaped America today. The final resting places of Martin Luther King Jr. and Coretta Scott King are in Atlanta. The Carter Presidential Center is in Atlanta and his hometown is Plains, Georgia.
Tax Climate
The top individual income tax rate is 5.75% and the top corporate income tax rate is also 5.75%.
Apportionment: Georgia taxpayers apportion income using a single sales factor formula.
Georgia follows market-based sourcing for the receipts of intangibles.
Sales Tax Structure
The state sales tax rate is 4%. However, like many states, Georgia’s counties and cities also add onto the sales tax rate. As such, the rate can be as high as 8.9%. Atlanta’s current combined sales tax rate is 8.5%.
Sellers who lack physical presence in Georgia and have sales into the state that exceed $100,000 or who have more than 200 transactions in the previous or current calendar year must register and remit sales tax to the state. Gross revenue from retail sales of tangible personal property delivered electronically or physically to a location in the state for consumption, use, or storage in the state. Taxable services are not included in the threshold. Exempt sales, except resales, are included but exempt services are not included in the threshold. This legislation went into effect on January 1, 2019.
A marketplace facilitator that makes or facilitates taxable retail sales of $100,000 or more in aggregate in the previous or current calendar year is the retailer for each taxable retail sale it facilitates in Georgia on behalf of a marketplace seller. A franchisor is not considered a facilitator with respect to any dealer that is its franchisee. This legislation went into effect on April 1, 2020.
All digital books, digital audio works and digital audio-visual works are not subject to taxation. Prewritten software which is electronically downloaded is nontaxable. It is taxable if sold in a tangible medium. Custom software is nontaxable, regardless of how transferred to the customer. Software-as-a-Service is exempt from taxation, as are all cloud services. How products are produced, sold and delivered is critical to determining the tax status.
Many states have annual sales tax holidays, during which certain items the state wants to promote the purchase of (like school supplies emergency preparedness supplies, or energy efficient appliances) can be purchased sales tax free. Georgia allows you to purchase the following items tax-free during their annual sales tax holidays: In July: $20 in school supplies, $100 in clothing, and $1,000 in computers for the Back To School sales Tax Holiday. In October: $1,500 in Energy Star/ WaterSense certified efficient products and appliances.
Our team at Miles Consulting Group is always available to discuss the specifics of your state tax situation, whether in Georgia or other states, we can help you navigate the complex tax structures arising from your multistate operations. Call us to help you achieve the best tax efficiencies.
Random Facts
- Georgia is the largest state east of the Mississippi River in land area.
- The main headquarters of The Weather Channel is in Atlanta.
- Georgia is one of the leading states in frequency of tornadoes, though they are rarely stronger than F1.
- With a coastline on the Atlantic Ocean and its proximity to the Gulf of Mexico, the state is vulnerable to hurricanes.
- The port of Savannah is the fourth largest seaport in the United States, importing and exporting a total of 2.3 million TEUs per year. A twenty foot equivalent unit (TEU) is a unit of measure used for capacity in container transportation, as in a container ship.
- Georgia is in the top five blueberry producers in the United States.
- In 1829, gold was discovered in the North Georgia Mountains.
Why The Wayfair Decision Is Complicating More Than Just Online Sales Tax
It's been nearly three years, but the Wayfair decision is still impacting businesses in unexpected ways.
As a result of the decision in that case, almost every state with a general sales tax has implemented what many in the business refer to as 'Wayfair laws.' More specifically, economic nexus and marketplace facilitation legislation.
The speed at which these laws were implemented by states eager for additional sources of tax revenue meant that interactions between Wayfair legislation and other laws may not have been fully considered or understood at the time. Even now, as the last holdout states finally join the rest by implementing their own Wayfair laws, businesses are still feeling the effects in areas other than just online sales tax.
Direct-to-consumer (DTC) sales of alcohol have been growing over the last few years, but the pandemic pushed that growth into high gear. Marketplace facilitation legislation, which typically shifts the burden of collecting and remitting sales and use tax from the retailer to the online marketplace, obviously impacts online sales tax on these DTC alcohol sales. However, it's also impacting (and complicating) the sales process in general.
As shared by Avalara, the laws that govern the responsibilities of unlicensed third-party providers (TPPs) and the licensed retailers often conflict with marketplace facilitation legislation. In essence, marketplace facilitation legislation places the burden of certain responsibilities with the TPP, but alcohol laws often require the responsibility to be taken on by the licensee.
California is the first state to offer specific guidance in regards to this conflict, but as DTC sales of alcohol continue, more states will likely need to do the same.
In addition to alcohol sales, the Wayfair decision has also inspired a slew of "Wayfair-style" laws in areas other than online sales tax, which complicate matters even further. Hawaii was the first state to do so. In 2019, the governor approved a bill with enacted an economic income tax standard for businesses without a physical presence in the state.
Several other states, including Oregon, Pennsylvania and Washington have followed suit and implemented laws styled after Wayfair-related legislation in areas outside of online sales tax.
As time passes and Wayfair legislation continues to be refined, we expect to see other interesting and unexpected interactions as a result. To keep on top of your business's tax liabilities, it's vital to stay on top of tax changes as they happen. Keep an eye on this blog to learn more!
If you have questions regarding your online sales tax liabilities, or any other state sales tax compliance questions, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
What To Know About The Taxability Of SaaS In 18 Key States
This information provided in this post was updated in November 2023, and now includes an additional 2 states.
Almost every day we receive a call or inquiry from a potential client who has questions about the sales tax ramifications for Software-as-a-Service (SaaS) products. While the laws vary from state to state, the SaaS revenue stream is subject to tax in some form in over 25 different jurisdictions in the US. In some cases, SaaS might not be subject to state level tax, but may be taxed at the local level (see Colorado and Illinois below for further discussion). To add to the confusion, companies who may deliver a SaaS based product, but also still have some legacy enterprise software that is electronically downloaded may find that the two products are subject to tax differently.
In this article, we’ll shed some light on the rules for both SaaS and electronically downloaded software in 20 key states. (Sure the title says 18 – but we took our most popular blog of all time and retooled it for our readers – and included a couple more states for your reading enjoyment.)
Have a specific question about sales tax and SaaS, contact us directly at info@milesconsultinggroup.com to set up an appointment.
Here is a quick link to the taxability of SaaS in your selected state, as discussed in more detail below:
- Taxability of SaaS in California
- Taxability of SaaS in Colorado
- Taxability od SaaS in Connecticut
- Taxability of SaaS in Florida
- Taxability of SaaS in Georgia
- Taxability of SaaS in Illinois
- Taxability of SaaS in Indiana
- Taxability of SaaS in Maryland
- Taxability of SaaS in Massachusetts
- Taxability of SaaS in Nebraska
- Taxability of SaaS in New Mexico
- Taxability of SaaS in New York
- Taxability of SaaS in North Dakota
- Taxability of SaaS in Ohio
- Taxability of SaaS in Pennsylvania
- Taxability of SaaS in South Carolina
- Taxability of SaaS in South Dakota
- Taxability of SaaS in Texas
- Taxability of SaaS in Utah
- Taxability of SaaS in Washington
1. Taxability of SaaS in California
Economic Nexus Provisions: Yes
companies with $500,000 in sales establish economic nexus and are required to collect and remit sales tax in this state, as long as they meet the threshold rules in either the current or preceding calendar year.
SaaS and Cloud Computing Tax Rules: Nontaxable
Sales and use tax does not apply to SaaS, which California describes as, “A customer gains access to software on a remote network without receiving a copy of the software, while the seller retains exclusive possession and control of it.” While California has not specifically codified the SaaS revenue stream, the state takes the position that it is akin to electronically downloaded software, which is exempt.
*Electronically Downloaded Software Treatment: Nontaxable
According to California’s statutes, the sale of a prewritten program is not taxable if the program is electronically delivered to the customer and the customer does not obtain possession of tangible personal property (e.g. storage media) in the transaction.
*For the purposes of this article, we are addressing the taxability of pre-written or canned software (not custom software) that is delivered electronically. Custom software is exempt in most states, regardless of the method of delivery.
*SaaS and Cloud Computing vs. Electronically Downloaded Software
In this state, SaaS, cloud computing and electronically downloaded software are all defined as nontaxable in all instances where the customer doesn’t physically obtain tangible property.
*For purposes of this blog article, we address the taxability of pre-written or canned software (vs. custom software), which is delivered electronically. Custom software is exempt from tax in most states, regardless of the method of delivery.
2. Taxability of SaaS in Colorado
Economic Nexus Provisions: Yes
As of June 1, 2019 , companies with $100,000 in gross revenue establish economic nexus and are required to collect and remit sales tax in this state, as long as they meet the threshold rules in either the current or preceding calendar year. The sale of exempt goods is included in determining whether a retailer has met the economic nexus threshold.
SaaS and Cloud Computing Tax Rules: Nontaxable
In Colorado, computer software is not taxable when delivered through an application service provider, electronic computer software delivery, or transferred by load and leave computer software delivery. This includes SaaS, cloud computing, and information and data processing services. It is important to note that several of Colorado’s home rule cities (such as Denver and Boulder) do subject the SaaS revenue stream to the local sales tax. Separate registration is required to properly report local taxes.
Electronically Downloaded Software Treatment: Exempt
Prewritten computer software delivered electronically is not subject to tax because software that is delivered electronically is not tangible personal property.
SaaS and Cloud Computing vs. Electronically Downloaded Software
Because Colorado doesn’t define SaaS, cloud computing or electronically downloaded software as a tangible item, all of them are nontaxable/exempt from sales and use tax in the state.
3. Taxability of SaaS in Connecticut
Economic Nexus Provision: Yes
Effective July 1, 2019, Connecticut considers an out-of-state retailer to have the requisite level of economic nexus if the retailer has gross revenue from Connecticut sales of tangible personal property or services equal to or exceeding $100,000 for the preceding year; and 200 or more separate transactions for the preceding year.
SaaS and Cloud Computing Tax Rules: Taxable (reduced rate)
Effective Oct. 1, 2019, the sale of electronically accessed prewritten computer software is generally taxable at the state's standard rate as sales of tangible personal property. However, electronically accessed prewritten computer software (i.e.; SaaS) purchased by a business for use by such business is taxable at the 1% rate for computer and data processing services.
Electronically Downloaded Software Treatment: Taxable (reduced rate)
Effective Oct. 1, 2019, sales of prewritten computer software delivered electronically are considered sales of tangible personal property subject to the state's standard rate. However, if prewritten computer software delivered electronically is purchased by a business for use by such business it is taxable at the 1% rate for computer and data processing services.
4. Taxability of SaaS in Florida
Economic Nexus Provisions: Yes
Starting July 1, 2021, companies with $100,000 in sales the previous calendar year are required to collect and remit sales tax.
SaaS and Cloud Computing Tax Rules: Nontaxable
Florida has no statutes or regulations regarding the sales or use taxation of cloud computing or SaaS. The state’s Department of Revenue also determined that membership fees to access cloud computing and on-demand software are not taxable as there is no transfer of tangible personal property. Florida has no specific statute or regulation regarding the sales taxation of cloud computing, though the State has issued Technical Assistance Advisements. Generally it is well established in Florida that licenses to use software accessed electronically are not subject to taxation because there has been no transfer of tangible personal property.
*Electronically Downloaded Software Treatment: Nontaxable
Sales of canned software, electronically downloaded by the customer are not subject to tax in Florida. These sales are not subject to tax because no transfer of tangible personal property occurs.
In addition, licenses for the use of software accessed electronically are not considered sales of tangible personal property, and therefore are not subject to state sales tax, as long as no transfer of tangible personal property occurs as a part of the transaction.
*For the purposes of this article, we are addressing the taxability of pre-written or canned software (not custom software) that is delivered electronically. Custom software is exempt in most states, regardless of the method of delivery.
*SaaS and Cloud Computing vs. Electronically Downloaded Software
Florida doesn’t tax SaaS, cloud computing or electronically downloaded software because the state doesn’t define any of them as tangible personal property.
*For purposes of this blog article, we address the taxability of pre-written or canned software (vs. custom software), which is delivered electronically. Custom software is exempt from tax in most states, regardless of the method of delivery.
5. Taxability of SaaS in Georgia
Economic Nexus Provisions: Yes
As of January 1, 2020, companies with either $100,000 in sales or 200 separate transactions establish economic nexus and are required to collect and remit sales tax. As of January 1, 2020, the threshold will be reduced to $100,000. Only sales for retail are included in the nexus threshold calculation. Sales for resale are not.
SaaS and Cloud Computing Tax Rules: Nontaxable
Georgia does not impose sales and use tax on SaaS, cloud-based services or hosting services. Prewritten computer software, delivered either electronically or through “load and leave” is also not subject to tax in the state, nor are computer related services, including information and data processing services.
Electronically Downloaded Software Treatment: Nontaxable
Computer software delivered electronically is not a sale of tangible personal property and therefore is not subject to sales and use tax.
Georgia is very clear that the method of delivery needs to be indicated on the dealer’s invoice, purchase contract or other documentation, or the state will assume the transaction was made through a tangible medium.
SaaS and Cloud Computing vs. Electronically Downloaded Software
This state doesn’t tax SaaS, cloud computing or electronically downloaded software either as they aren’t defined as tangible personal property. Georgia also does not impose sales or use tax on hosting services.
6. Taxability of SaaS in Illinois
Economic Nexus Provisions: Yes
As of October 1, 2018, companies with either $100,000 in sales or 200 separate transactions establish economic nexus and are required to collect and remit sales tax, as long as they meet the threshold requirements in the preceding 12-month period (analyzed every calendar quarter). Starting January 1, 2021, companies are also be required to collect and remit local sales tax.
SaaS and Cloud Computing Tax Rules: Nontaxable
Illinois does not impose tax on SaaS delivered via a cloud-based system, provided the transaction does not include a transfer of tangible personal property.
This means that if the software is provided via cloud-based delivery, and the software is never actually downloaded onto a customer’s computer in Illinois, the provider is acting as a serviceman rather than a retailer and the services are not subject to any of these state taxes:
- Retailers’ Occupation Tax
- Use Tax
- Service Occupation Tax
- Service Use Tax
However, if an API, applet, desktop agent or remote access agent is provided to the subscriber to enable access to the provider’s network and services, the subscriber is then considered to have received computer software from the provider. This makes the transaction subject to tax, even if there is not a separate charge to the subscriber for the computer software, unless the transaction qualifies as a non-taxable license of computer software.
If the provider is not otherwise required to be registered for purposes of the Retailers’ Occupation Tax, and qualifies as a de minimis serviceman, the provider could elect to pay Use Tax on its cost price of the computer software.
Another item of note is that while the State of Illinois does not subject SaaS to sales tax, the city of Chicago does tax the SaaS revenue stream in the form of its Personal Property Lease Transaction Tax. . While not a sales tax, per se, it acts a lot like one and is often missed by companies with customers in the city. For more information about this “unique” approach in Chicago, please contact us.
Electronically Downloaded Software Treatment: Taxable
The sale at retail or transfer of canned software intended for general or repeated use is taxable when it is delivered electronically. However, Illinois does have some notable exceptions to this if the software meets a 5 Prong Test. Contact us for more information.
SaaS and Cloud Computing vs. Electronically Downloaded Software
Because Illinois doesn’t consider SaaS or cloud computing tangible property, neither is subject to tax. However, electronically downloaded software is considered tangible property, which is why it’s subject to the state’s taxes.
7. Taxability of SaaS in Indiana
Economic Nexus Provisions: Yes
As of October 1, 2018, companies with either $100,000 in sales or 200 separate transactions establish economic nexus and are required to collect and remit sales tax.
SaaS and Cloud Computing Tax Rules: Depends (But Generally Nontaxable)
The taxability of “cloud-based” software or SaaS depends on the facts and circumstances of each transaction, including the amount of control or possession granted to the purchaser.
Charges for access to prewritten software located on computer servers outside of the customer’s workplace are taxable if the customer gains constructive possession and the right to use, control or direct the software’s use.
However, these charges are not subject to tax if the customer is not transferred the software, does not have an ownership interest in the software, and does not control or possess the software or the server (this is generally the case with typical SaaS contracts).
Along these lines, a subscription to an online database that allows the customer to download reports, documents and other information is not subject to tax if the customer does not gain control of the underlying software of the database.
Where a customer can show that charges are actually for professional or personal services and access to software is merely incidental to the services, the transaction will not be treated as the taxable sale of prewritten software accessed via cloud computing.
Electronically Downloaded Software Treatment: Taxable
Prewritten computer software is subject to gross retail tax, regardless of the method by which the software is delivered (tangible medium, load and leave, or electronically).
Use tax is due on software and software licenses for which a taxpayer accepts delivery in Indiana, and for which it provides no evidence that the software or licenses were “used” in another state.
SaaS and Cloud Computing vs. Electronically Downloaded Software
When it comes to cloud computing and SaaS, Indiana is a bit more confusing as it depends on how much control or possession the user has. Access to data doesn’t necessarily make the services taxable, however control of the database does. Electronically downloaded software, on the other hand, is always subject to Indiana’s taxes.
8. Taxability of SaaS in Maryland
Economic Nexus Provision: Yes
Effective Oct. 1, 2018, Maryland imposes collection requirements on out-of-state vendors who, in the previous or current calendar year, have gross revenue in excess of $100,000 from the sale of tangible personal property or taxable services delivered into the state, or who have 200 or more separate transactions of the same.
SaaS and Cloud Computing Tax Rules: Depends (limited timeframe)
Prior to March 2021, SaaS was not subject to tax in Maryland. But, effective March 14, 2021, SaaS is generally subject to Maryland's sales and use tax as a “digital product.” However, effective July 1, 2022, there is an exemption for SaaS purchased or licensed solely for commercial purposes in an enterprise computer system, including operating programs or application software for the exclusive use of the enterprise software system, that is housed or maintained by the purchaser or on a cloud server, whether hosted by the purchaser, the software vendor, or a third party.
Thus, a company reaching the economic nexus threshold must determine whether its revenue from SaaS subscriptions was taxable during the period from March 14, 2021 to July 1, 2022.
Electronically Downloaded Software Treatment: Depends (limited timeframe)
In Maryland the rules above for SaaS are the same for electronically downloaded software. Prior to March 2021, electronically downloaded software was not subject to tax in Maryland. But, effective March 14, 2021, it became subject to Maryland's sales and use tax as a “digital product.” However, effective July 1, 2022, there is an exemption for software purchased or licensed solely for commercial purposes in an enterprise computer system, including operating programs or application software for the exclusive use of the enterprise software system, that is housed or maintained by the purchaser or on a cloud server, whether hosted by the purchaser, the software vendor, or a third party.
9. Taxability of SaaS in Massachusetts
Economic Nexus Provisions: Yes
As of October 1, 2019, companies with $100,000 in sales establish economic nexus and are required to collect and remit sales tax. Note that prior to 2019, Massachusetts had an interesting “cookie nexus” requirement which provided that certain out of state vendors created nexus in the state by virtue of an electronic cookie being placed on a customer’s computer. That law was repealed in October 2019.
SaaS and Cloud Computing Tax Rules: Taxable
Both SaaS and cloud computing are generally subject to sales and use tax in Massachusetts.
The sale, license, lease or other transfer of a right to use software on a server hosted by a business or a third-party is generally taxable; Massachusetts has previously referenced the access of software from a hosted server as SaaS.
A company’s cloud computing sales that use either of the following do not involve taxable sales of prewritten software, and thus are not taxable when sold to customers in the state:
- A customer’s own software (not purchased from the company)
- Open-source (free) software available on the internet
However, a company’s cloud computing sales that include software licensed by the company are taxable when sold to customers in Massachusetts, whether or not there is a separately stated charge for the software and whether or not there is a sub-license of the software to the customer, because the object of the transaction is acquiring the right to use the software.
Electronically Downloaded Software Treatment: Taxable
Sales of prewritten computer software, regardless of the method of delivery, are subject to the Massachusetts sales tax.
SaaS and Cloud Computing vs. Electronically Downloaded Software
SaaS, cloud computing and electronically downloaded software are all taxable in the state because the object of the transaction is acquiring the right to use the software.
10. Taxability of SaaS in Nebraska
Economic Nexus Provisions: Yes
Effective April 1, 2019, companies with either $100,000 in sales or 200 separate transactions establish economic nexus and are required to collect and remit sales tax.
SaaS and Cloud Computing Tax Rules: Nontaxable
This state has not specifically addressed the taxability of cloud computing by statute or regulation, although it has released a guide that explains sales for cloud computing and SaaS services are not taxable, no matter where the hardware, software or other network components are located
Electronically Delivered Software Treatment: Taxable
Although SaaS and cloud computing services are not taxable in Nebraska, prewritten software that’s electronically delivered to the purchaser is subject to sales and use tax in the state.
11. Taxability of SaaS in New Mexico
Economic Nexus Provisions: Yes
As of July 1, 2019, companies with $100,000 in sales will establish economic nexus and will be required to collect and remit the state’s gross receipts tax (the state does not have a traditional sales tax) if they meet the sales threshold requirement in the prior calendar year. There is no transaction threshold.
SaaS and Cloud Computing Tax Rules: Taxable
Services, including SaaS and cloud computing services, are subject to New Mexico’s gross receipts tax, as long as the services are used in New Mexico. For this reason, the taxability of cloud computing services in New Mexico does not depend on the location of servers from which these services are accessed. For instance, charges to use information or data located on a remote server are subject to tax if the information or data is received in New Mexico.
Electronically Downloaded Software Treatment: Taxable
In New Mexico, receipts from the sale or license of prewritten software delivered electronically are subject to gross receipts tax.
12. Taxability of SaaS in New York
Economic Nexus Provisions: Yes
As of June 21, 2018, companies with both $500,000 in sales and 100 separate transactions establish economic nexus. They are then required to collect and remit sales tax, as long as they meet the threshold requirements in the immediately preceding four sales tax quarters. Read more details in our blog post about New York’s economic nexus provisions.
SaaS and Cloud Computing Tax Rules: Taxable
The sale of a license to remotely access prewritten software to a New York customer is subject to tax and the sale is sourced to the jurisdiction in which the purchaser uses or directs the use of the software. This applies to SaaS as well as cloud-based services.
The Department of Taxation and Finance decided that if a purchaser remotely accesses software over the internet, possession of the software transfers to the purchaser because he or she gains constructive possession and the right to use or control the software. As a result, selling a license to remotely access software is subject to tax and the sale is sourced to the jurisdiction in which the purchaser uses or directs the use of the software.
Electronically Downloaded Software Treatment: Taxable
New York imposes sales and use tax on prewritten computer software because the state considers it to be tangible personal property.
Prewritten software that is merely accessed by customers electronically, but not actually transferred to customers, is taxable as a sale of prewritten software. Sales of access to software are considered the transfer of possession. If the customer accesses the software within the state, the sale is sourced to New York, even if the software is stored on a server out-of-state.
SaaS and Cloud Computing vs. Electronically Downloaded Software
In New York, SaaS and cloud computing are considered taxable because it involves a revenue stream from a license to use or direct the use of the software. Electronically downloaded software is also considered taxable because the state defines it as tangible personal property.
13. Taxability of SaaS in North Dakota
Economic Nexus Provisions: Yes
As of October 1, 2018 , companies with $100,000 in sales establish economic nexus and are required to collect and remit sales tax.
SaaS and Cloud Computing Tax Rules: Limited Guidance
This state has no official regulations or statutes regarding how sales and use tax applies to cloud computing or SaaS. However, North Dakota imposes sales and use tax on the sale, lease or rental of canned (prewritten) computer software regardless of the method in which it is delivered, be it in tangible form, electronically delivered, or by load and leave. As such, that may be an indication of taxability of SaaS as well.
Electronically Delivered Software Treatment: Taxable
Although North Dakota doesn’t provide any guidance regarding the taxability of SaaS and cloud computing, it does state that prewritten software that’s sold, leased or rented – even when delivered electronically – is subject to sales and use tax. The state defines electronic delivery as, “Delivered from the seller to the purchaser by means other than tangible storage media.”
14. Taxability of SaaS in Ohio
Economic Nexus Provisions: Yes (cookie nexus)
As of August 1, 2019, companies with $100,000 in sales or 200 separate transactions establish economic nexus and are required to collect and remit sales tax, as long as they meet the threshold requirements in the current or preceding calendar year.
SaaS and Cloud Computing Tax Rules: Taxable
Customers using a provider’s SaaS or cloud-based services to perform computations, run programs or store data is subject to sales and use tax in Ohio if the customer is using the service for business purposes. By statute, such services are included in the definition of a taxable sale.
If the consumer is using the service for personal purposes, then the service is not subject to tax.
For services related to cloud computing, the service is generally considered to be received at the customer’s terminals. The nature of such services might produce instances in which the service provider cannot ascertain the location from which the service is accessed. In this case, the service is presumed to be used at the location of the customer’s billing address.
Electronically Downloaded Software Treatment: Taxable
Ohio imposes sales tax upon the sale of prewritten software regardless of whether it is delivered electronically or via load and leave.
15. Taxability of SaaS in Pennsylvania
Economic Nexus Provisions: Yes
As of July 1, 2019, companies with $100,000 in sales establish economic nexus and are required to collect and remit sales tax, as long as they meet the threshold requirements in the preceding 12-months.
SaaS and Cloud Computing Tax Rules: Taxable
Cloud computing in the form of SaaS is subject to the state’s sales and use tax if the user is located in Pennsylvania.
The taxability of remote access to software in Pennsylvania depends on the location of the user. If the user is accessing the software from within the state, the transaction is subject to tax. If the user is accessing the software from an out-of-state location, the transaction is not subject to tax, even if the server resides in Pennsylvania.
The Department of Revenue determined that because computer software is tangible personal property, the charge for electronically accessing taxable software is taxable if the user is accessing the software from within Pennsylvania. In accessing taxable software, the user is exercising a license to use the software, as well as control or power over the software, at the user’s location.
Electronically Downloaded Software Treatment: Taxable
The retail sale or use of canned software (including updates) transferred electronically is subject to Pennsylvania’s sales and use tax laws.
Software licenses are considered licenses to use canned software and constitute tangible personal property, regardless of the method of delivery.
SaaS and Cloud Computing vs. Electronically Downloaded Software
When it comes to SaaS and cloud computing, taxability is determined by the user’s location. Pennsylvania’s Department of Revenue considers a license to access the software a tangible, taxable item, just as it defines electronically downloaded software to be tangible and therefore subject to taxes.
16. Taxability of SaaS in South Carolina
Economic Nexus Provisions: Yes
As of November 1, 2018, companies with $100,000 in sales establish economic nexus. They are then required to collect and remit sales tax, as long as they meet the threshold requirements in the current or preceding calendar year.
SaaS and Cloud Computing Tax Rules: Taxable
This state taxes charges to access a cloud-based database, SaaS or online information service. This includes legal research services, credit reporting/research services, and charges to access an individual website (including application service providers).
Charges for computer software delivered by an application service provider are also subject to sales or use tax. The South Carolina Department of Revenue considers an application service provider to be sufficiently similar to “database access transmissions,” which were ruled to be subject to sales and use tax.
“Database access transmissions” are defined as the transmission of computer database information and programs by and through a modem and telephone lines, whether automatically transmitted or transmitted as a result of a subscriber accessing a computer, for which charges may be based on the amount of time the transmission is utilized.
Additionally, software subscriptions services are considered tangible property and are subject to sales and use taxes.
Electronically Downloaded Software Treatment: Nontaxable
Interestingly, given South Carolina’s fairly aggressive rules on SaaS, prewritten software delivered electronically is not subject to tax.
SaaS and Cloud Computing vs. Electronically Downloaded Software
While electronically delivered software isn’t taxable in South Carolina, SaaS and cloud computing are considered taxable as they’re similar enough to “database access transmissions.”
17. Taxability of SaaS in South Dakota
Economic Nexus Provisions: Yes (of course – this is the state that started it all!)
As of November 1, 2018, companies with $100,000 in sales or 200 separate transactions establish economic nexus and are required to collect and remit sales tax. In a nod to help smaller companies with lower dollar value transactions, as of July 1, 2023, the state’s transaction threshold has been lifted and sellers need only heed the overall $100,000 sales threshold.
SaaS and Cloud Computing Tax Rules: Taxable
While this state hasn’t directly addressed the taxability of SaaS, it does impose sales and use taxes on all computer software and services. According to the tax code, the services are sourced to the location where the service is provided. South Dakota also imposes sales taxes on fees paid to access a database or network as well as software, programs or computer systems in the cloud.
Electronically Delivered Software Treatment: Taxable
Prewritten software that is delivered electronically is taxable in South Dakota.
18. Taxability of SaaS in Texas
Economic Nexus Provisions: Yes
As of October 1, 2019, companies with $500,000 in gross revenue will establish economic nexus and will be required to collect and remit sales tax, as long as they meet the threshold rules in the preceding 12 calendar months. The state does not have a transaction threshold.
SaaS and Cloud Computing Tax Rules: Partial Exemption
In Texas, SaaS and cloud computing are considered to be taxable data processing services. The Texas Comptroller has consistently ruled that providing access to software hosted on a remote server via the internet where a customer may input, retrieve and manage data is a taxable data processing service. Twenty percent (20%) of the value of taxable data processing services is exempt from tax, so effectively 80 percent of a company’s SaaS revenue stream is subject to sales tax and must be collected from customers accordingly.
Electronically Downloaded Software Treatment: Taxable
Prewritten computer software is considered tangible personal property in Texas, which means the sale, use, rental or lease of such software is subject to sales and use tax, regardless of the method of transfer.
SaaS and Cloud Computing vs. Electronically Downloaded Software
This state defines SaaS and cloud computing as data processing services, making them subject to the data processing service tax (with 20 percent of the value exempt). Electronically downloaded software is also taxable but does not benefit from the definition of data processing services, making it taxable at the full rate.
19. Taxability of SaaS in Utah
Economic Nexus Provisions: Yes
As of January 1, 2019, companies with $100,000 in gross revenue or 200 transactions establish economic nexus and are required to collect and remit sales tax.
SaaS and Cloud Computing Tax Rules: Taxable
Utah imposes sales and use tax on license fees for remotely accessed prewritten software purchased for use of the software in Utah including:
- Hosted software
- Application service provider software
- SaaS
- Cloud computing applications
The Utah Tax Commission interprets Utah Code to mean that prewritten software accessed by a user in the state is subject to tax without regard to the location of the server. Therefore, the use of prewritten software over the internet that is not downloaded by the purchaser is subject to Utah sales tax.
One exception to this is databases (as of July 1, 2013). Amounts paid or charges to access a database are exempt from sales and use tax as long as the primary purpose for accessing the database is to view or retrieve information. The exemption does not apply to amounts paid or charged for a digital audio work, digital audio-visual work or digital books.
Electronically Downloaded Software Treatment: Taxable
Sales and use tax is imposed on prewritten computer software delivered electronically, and sales, rentals, leases and charges for using prewritten software in Utah are taxable regardless of delivery method.
SaaS and Cloud Computing vs. Electronically Downloaded Software
In this state, SaaS, cloud computing and electronically downloaded software are all defined as taxable.
20. Taxability of SaaS in Washington
Economic Nexus Provisions: Yes
As of October 1, 2018, companies with $100,000 in sales establish economic nexus and are required to collect and remit sales tax. Washington was also an early adopter of marketplace facilitator legislation. As such, large companies which are “marketplaces,” like Amazon, are already collecting the tax. Washington keeps issuing additional guidance regularly, so is a state we’ll want to keep an eye on, too.
Note that Washington also imposes a “Business and Occupation” tax, in lieu of a state corporate income tax. This B&O tax is often confusing for companies because it is reported on a combined tax return with the sales tax, but is a different tax. The B&O also has different economic nexus thresholds than does the sales tax.
SaaS and Cloud Computing Tax Rules: Taxable
Washington considers charges made to consumers for the right to access and use prewritten computer software, where possession of the software is maintained by the seller or a third party, to be a taxable service regardless of whether the charge for this service is on a per use, per user, per license, subscription or some other basis. This service includes the right to access and use prewritten computer software to perform data processing.
Also subject to tax are “digital automated services,” which include services transferred electronically that use one or more software applications. However, taxable digital automated services do not include services that primarily involve the application of human effort by the service provider, such as alarm monitoring systems. Nontaxable digital automated services require an average of the services provided through the expenditure of human effort representing more than 50 percent of the time and cost of providing the services.
Electronically Downloaded Software Treatment: Taxable
Prewritten computer software, regardless of the method of delivery, is generally subject to use tax when it is used in Washington as long as the state’s retail sales tax was not previously paid.
However, separately stated charges for custom software and customization of prewritten software are not subject to retails sales or use tax.
SaaS and Cloud Computing vs. Electronically Downloaded Software
In this state, SaaS, cloud computing and electronically downloaded software are all defined as taxable
Summary
In summary, we hope you’ve found this article to be useful as you begin to navigate the sales taxability of SaaS. In case you’re wondering which additional states subject the SaaS revenue stream to sales tax – they include Alaska (locally as the state has no state level tax), Arizona, District of Columbia, Hawaii, Iowa (depends on the use), Kentucky, Mississippi, Rhode Island, Tennessee, and West Virginia.
Remember that it’s not as simple as just knowing which states impose a tax on the SaaS revenue stream, it’s also important to know when you created nexus, when the state enacted laws taxing SaaS, and how best to register and remediate any prior liabilities. This is but a start. We can help with that! Contact us at Miles Consulting Group at info@milesconsultinggroup.com or 408-266-2259.
General SaaS Sales Tax FAQ’s
Q: Are software licenses subject to sales tax?
A: Depending on the state, software licenses can be subject to sales tax. In some states like California, Colorado, Florida, Georgia, Indiana, and Nebraska, , SaaS and cloud computing services are generally considered nontaxable, and sales tax does not apply to them. However, in other states like Massachusetts, New York, Ohio, Pennsylvania, South Carolina, Texas, Utah, and Washington, these subscription revenue streams services are generally taxable. So, the taxability of software licenses varies by state law.
Q: Is sales tax applicable to software subscriptions?
A: Similar to software licenses, the taxability of software subscriptions depends on the state. In some states, software subscriptions are considered taxable if they involve SaaS or cloud computing services. States like Texas and Utah, for example, tax license fees for remotely accessed prewritten software, including SaaS and cloud computing applications. However, in states like California, Florida, and Colorado, software subscriptions are generally nontaxable. So, whether sales tax applies to software subscriptions depends on the specific laws of the state in question.
Missouri- The Last State to Enact Economic Nexus Legislation.
The 2018 U.S. Supreme Court ruling in South Dakota v. Wayfair has changed the dynamic of sales tax in a number of ways. Where almost every state in the union has already enacted economic nexus legislation for remote sellers, states like Florida and Missouri have been late to the party to impose sales tax with respect to seller’s economic nexus in the state. On April 19, 2021, Florida lawmakers finally joined the other 43 states to impose an economic nexus threshold, and now Missouri is also set to finally pass a similar law.
Earlier this week, the Missouri legislature approved S.B. 153 in a 102-42 vote, following some modifications in the bill. Missouri Rep. John Eggleston said, “We have to be fair to out-of-state businesses because that’s what the Supreme Court said, and we want to help our in-state businesses to better compete.” He also added, “After a lot of negotiation, I think we’re at a pretty good spot.”
