Collecting Sales Tax on Software

3 Practical Things to Remember About Collecting Sales Tax on Software

This is a complex issue, but here are a few practical things to remember.

1) This Is a State Law Issue. You have to look at the rules on a state-by-state basis.

• Some states don’t tax software, others do (e.g., NY).
• Some states only tax off-the-shelf software but not custom software (e.g., WI).
• Some states tax the software if you send a CD/media but not if it is downloaded (e.g., CA).

Takeaway: Figure out where your customers are, then look at that state’s sales and use tax law.

2) Don’t Kick the Can Down the Road. Too many software companies say “I’ll deal with this later” and then find it is really difficult and expensive to fix. You are supposed to collect and remit sales tax — if you don’t, you are still liable for it. It’s awkward to call a customer years later asking them to reimburse you for sales tax you forgot to collect. This will come up during any investment or sale of your company.

3) Get Reseller (Exemption) Certificates. You don’t have to collect sales tax from companies reselling your software — but get a resale certificate from them. Taxing authorities will ask for these.

Complex and needs analysis on a state-by-state basis, but these three things matter.

For the wider SaaS sales tax picture (and the OpenView CFO Forum framing), see Sales Tax on SaaS: What I Learned at the OpenView CFO Forum.

Disclaimer:

This is for informational and educational purposes only; no legal advice is provided.