Sourcing is Key to Sales Tax Compliance for Technology Companies
How does the Wayfair ruling impact technology companies? The answer is complicated but the question should not be ignored. In fact, technology businesses, especially Software as a Service (SaaS) and digital goods providers, are being pursued by Departments of Revenue all across the United States to hold them accountable for sales tax owed to the states.
In June 2018, the Supreme Court’s decision in South Dakota v. Wayfair, Inc., decided physical presence was no longer the only qualifier to impose a sales and use tax obligation upon a business. Now, many states have created provisions in their statutes requiring a business to begin collecting sales tax for taxable sales if certain economic thresholds are exceeded. To learn more about economic thresholds, read this article: Crash Course in Economic Nexus Thresholds.
These economic nexus laws are enforced to level the playing field between in-state sellers and remote online sellers. Technology companies are being targeted by states because once purchased, tech products are usually downloaded throughout the country which translates into sales in multiple states.
For a complete list of states with new nexus laws, download Cherry Bekaert’s charts:
To determine if economic levels have been met, technology companies need to quantify the volume of sales per taxing jurisdiction based on amount and invoice count. What seems to be a straight forward task is complicated for technology companies. To which state(s) is revenue sourced? Should the customer’s billing address be the determinate, or is the location where the product or service used? Do you even know where the product or service is used?
While each state provides its own set of rules for sourcing taxable property and services, the general rule of thumb applies as follows:
• If the state considers the sale to be taxable property, it is likely that revenues will be sourced to the destination of the sale.
For instance, if your company is selling digital goods, such as subscriptions to audio or visual works to customers/end-users located in Boise, Idaho, the state of Idaho will consider this to be a taxable sale of tangible property. Given that these are taxable sales and Idaho is a destination based state, sales revenues will be sourced to the customer/end-user address.
• If the state considers the sale to be a service, the sourcing rules include a significant amount of variability. However, more often than not the destination in which the service is provided is the right answer.
For example, cloud computing or remotely hosted software is subject to Pennsylvania's sales and use tax if the user is located in Pennsylvania. Under Pennsylvania’s destination-based sourcing, the point of delivery of taxable services is the location that determines the sourcing of the state sales and use tax.
A sales and use tax nexus review is one way to identify the jurisdictions where technology companies have nexus. Cherry Bekaert’s Nexus Review is conducted in three phases. First, our sales tax experts conduct an initial review to determine if and where the company has nexus. Then results and recommendations are presented before moving on the phase two (quantification of exposure) and phase three (implementation of resolutions).
Send us your questions about how the new economic nexus laws impacts your technology business: