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The answer is VERY MUCH dependent on the laws of your particular state (I assume you are in the U.S.). In ***some*** jurisdictions there is no sales tax if there is nothing "tangible" delivered (layman's terms, not tax law). So if the customer downloaded EVERYTHING it might not be taxable, but if you sent him one physical manual or similar, then the whole sale might be taxable.
But you need to consult someone who knows the laws and regulations of your state.
Categories: Operations and Legal
Forgive me if this was already discussed but has the issue of sales tax for software-as-a-Service been settled? Is the download of the software client that enables the 'service' considered a taxable event?
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February 27, 2006 2:17 PM
February 27, 2006 3:09 PM
Charles,
We are in Massachusetts. Are you saying that if we deliver a physical manual it may be taxable, but code may not be?
February 27, 2006 4:14 PM
I honestly have no idea about Mass. tax law, and couldn't give you specific tax/legal advice even if I did. ***Generally*** you ***may be*** better off from a tax point of view if you avoid delivering anything physical. I would be concerned that if you delivered anything tangible (such as a manual) that was part of a larger sale then the whole sale might be taxable.
March 7, 2006 6:52 PM
We are based outside the US but had some debates over this with our US customers, which were further confused because our servers are in a colo facility in the US. I realize you are asking about state-to-state issues, but I think this information may be helpful also. Our software is delivered using the ASP model, and nothing is physically provided.
The main test seemed to be did we have a "place of business" in the US. Our conclusion was we did not since we had no space (like a warehouse) or workers there. We did not benefit from having our servers in the US; we could just as easily put them in Canada and the customers would not notice any difference in service quality.
The IRS has issued some guidance on this. It's a dry read, but have a look at TD8785. Here's the reference from the CFR, which is available online:
[FONT=Courier New]
[4830-01-u]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 8785]
RIN 1545-AU70
Classification of Certain Transactions Involving Computer
Programs[/FONT]
My hunch (keep in mind I'm not a tax lawyer) is that no sales tax should apply unless you have a place of business in the same state as your customer.
Justin
March 7, 2006 7:18 PM
I have not read the IRS "dry read" that you posted but I wanted to note that the IRS is a US Federal agency that has nothing to do with state sales tax regulations, enforcement, or compliance.
Also, the "place of business" test sounds good but when I owned a software company (in California), Texas came after us for state sales tax on the theory that we owned software installed in the state (it was only licensed to our customers -- we still "owned" it) and New York came after us for state sales tax on the theory that our having leased a booth at a trade show there constituted a nexus (tax-speak for place of business) there.
Your "no benefit from the servers being in the US" theory sounds good but I don't know if it would impress a tax agent. I could argue that I got no benefit from purchasing a pack of chewing gum in New York rather than California, but I would still owe sales tax where I did buy it, not where I could have bought it.
March 7, 2006 7:34 PM
Okay, I found TD 8785 here http://www.irs.gov/pub/irs-irbs/irb98-42.pdf. My quick interpretation is that it mainly covers whether the licensing of software (presumably by a company subject to US Federal income taxes, irrespective of state sales taxes) to a foreign company is a sale or a lease (depending on certain details of the transaction).
In any event I am utterly confident of my statement that no IRS regulation has much if anything to do with state sales taxes.
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March 28, 2006 12:06 AM
I know that salesforce.com does not collect sales tax from their subscribers (at least within California). In fact, on their invoices they state that because salesforce.com is a service, no sales tax is required.
Has anyone had experience with this? We are a US company that currently sells perpetual licenses of packages software, but we are considering adding a subscription option. It would be a great perk if our customers weren't subject to sales tax if they subscribed to our software rather than buying a perpetual license.
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