Managing sales tax is a necessary part of doing business, but it’s not something that increases your profit. You take the sales tax you charge your customers to eventually pass it on to the state’s taxing authority. So, why would SaaS business leaders waste their time understanding the intricacies of sales tax, when it doesn’t bring in revenue? Like a lot of areas in the SaaS world, it’s all about automation.
We’ll cover a basic intro to sales tax, how to determine if your SaaS product is taxable, and how to avoid risk by getting sales tax compliant with automation.
What is sales tax?
Let’s start at the beginning. In the US, sales tax is governed at the state level and forty-seven US states (and DC) have a sales tax.
Sales tax is a percentage of a sale that businesses are required to collect at the point of sale and then remit to the state on a set schedule. Since sales tax is used to pay for budget items like schools, roads, and public safety, states are invested in ensuring they receive all the sales tax they are owed by law.
States set their own sales tax rates and define what products (and services) are subject to sales tax. If you meet sales tax nexus in a state and your product/service is taxable, you’ll be required to collect sales tax. Which leads us to..
What is nexus?
“Nexus” is just a fancy way of saying that you have a physical connection to a state.
Here are some conditions that create nexus:
- Having a physical location in a state (this includes home offices, headquarters, etc.)
- Having an employee, contractor, salesperson or other personnel in a state
- Having an affiliate in a state
- Temporarily doing business in a state such as making sales at a tradeshow
- Having a significant economic presence in a state
For example, a business will always have sales tax nexus in the state where it’s headquartered. However, you’re only required to collect sales tax if you both have nexus in a state and your product is taxable.
Determining if your SaaS product is taxable
This is where sales tax liability can be tricky. Each state varies on how they tax SaaS products. Some states, like Washington, consider SaaS a software and tax it as if it were a tangible product, meaning that your business is required to collect sales tax from your customers. Others, like California, consider SaaS a non-taxable service.
For the purposes of this post, we’re talking about SaaS products as cloud-based services, most often B2B, that are not sold as physical products or stored on a customer’s computer or network. Does that sound like your SaaS business? Then we have a list of states where SaaS is and is not taxable right here.
However, some states get nitpicky. For example, if you include a tangible item like a flash drive with your service, that item – or the entire service – may become taxable where it would not have been taxable before.
Also, a handful of states only consider SaaS taxable if it’s used for business purposes and not for personal use.
Not sure when you’re required to collect sales tax? TaxJar has your back. We’ll help you determine where you’re required to collect sales tax so you never have to worry about sales tax compliance. To learn more about TaxJar and get started, visit TaxJar.com/how-it-works.
Check out how fellow SaaS company Quimbee saves time TaxJar.
How to Save Time, Money, and avoid Risk by Automating your Sales Tax Compliance
There are so many intricacies of sales tax. The rules vary state-by-state and for a SaaS company selling in many states, it can be a nightmare to manage. That’s where TaxJar comes in. We’ll handle your sales tax compliance so you can focus on growing your business. TaxJar AutoFile gathers your sales tax data from all your sales channels and files your sales tax returns automatically. We’ll even remit what you owe to the state. Taking the manual work out of sales tax compliance not only gives you time back to focus on the parts of your business that generate revenue, but helps you avoid costly mistakes. AutoFile takes the guesswork out of determining the correct sales tax rate, so you can rest easy that you are protecting your business from risk.
TaxJar is here to help you mitigate sales tax risks and take the daily hassles of sales tax compliance off your plate. To learn more about TaxJar and get started, visit TaxJar.com/industry/saas.