When your company sells a software as a service (SaaS) product, it can be tricky to determine where and from which customers you are required to collect sales tax. Some states consider SaaS to be a non-taxable service, some consider it a taxable product, and some state taxing authority opinions fall in between.
This post will go over what you need to know about SaaS taxability if you are selling SaaS products to customers in New York.
Note: If you’re brand new to sales tax, we recommend checking out our Navigating Sales Tax Compliance eBook. This will walk you through important sales tax guidelines like how sales tax is governed at the state level, sales tax liability varies from business to business, and how rates are determined by your buyer’s location.
Should your business charge sales tax on SaaS in New York?
New York clearly defines prewritten software, no matter if sold in tangible format (such as on a flash drive), transmitted electronically (such as by download), or accessed online, as taxable.
Further, New York specifies that tax should be charged to the location where the purchaser plans to use or direct the software (buyer’s location), and not the location where the software originates (seller’s location). For example, if a user in Buffalo, NY purchases a SaaS product built by a developer in Brooklyn, NY then the tax charged should be the Buffalo sales tax rate.
New York, however, does make a couple of exceptions when it comes to SaaS taxability:
- Custom software is not taxable in New York. Custom software is defined as software designed and developed to the specifications of the particular purchaser. According to guidance from the New York Department of Revenue, “If the custom software is sold or otherwise transferred to someone other than the person for whom it was originally designed and developed, it becomes subject to tax.”
- Software used for production or research and development is not taxable in New York. “Prewritten computer software used or consumed directly and predominantly in the production of tangible personal property for sale, or directly and predominantly in research and development, is exempt from tax.” However, in order to purchase this software tax free, the New York buyer must provide the seller with a New York resale certificate.
How can I learn more about SaaS taxability in New York?
You can read more about SaaS taxability in New York Tax Bulletin ST-128.
How to automate sales tax when selling a SaaS product
Sales tax on SaaS can get tricky,, and that’s exactly why we built TaxJar.
With TaxJar’s Sales Tax API, all you need to do is let us know that you are selling a SaaS product by entering the product tax code that corresponds to your particular product. From there, we ensure that you collect the right amount of sales tax from every customer in every state where you are required to collect sales tax. If SaaS is non-taxable in a state, then your customer will not be charged.
Not only does TaxJar make sure you collect the right amount of sales tax, we automatically help you stay compliant in states where your business has economic sales tax nexus. On your behalf, we’ll track when your revenue or your number of transactions in a state exceeds that state’s threshold for economic nexus. No more guessing or digging into your books and each state’s individual nexus laws to determine when it’s time to start collecting sales tax.
Get started with TaxJar today for free with our 30-day TaxJar Professional Trial.