How Is Software As-A Service(SaaS)Treated Under State Tax Laws?

A very important and often misunderstood area in the sales tax arena is the taxability of cloud computing, cloud-based services, etc., collectively often referred to as Software-as-a-Service (or SaaS). The moniker alone is enough to start the state tax conversation down an interesting path.

The Basics

When we work with clients to determine how something should be taxed, we start with a few basic questions and then work from there.

Has nexus has been created?
This includes looking at both the physical presence as well as an economic presence. Following the U.S. Supreme Court’s June 2018 ruling in South Dakota v. Wayfair, many states enacted economic nexus statutes which require sellers to collect and remit sales tax in those states based on sales or transactional thresholds. In this process we also look at when nexus was created based on physical presence or economic nexus.

Is the product taxable?
Once nexus is established, the sale of tangible personal property by a retailer to a customer in a given state is generally taxable. We start there, and then review the transaction to see if there are any exemptions that would cause the sale of the property to not be taxable.

Certain services are taxable. How does the state treat services?
We also look to whether, after nexus has been established, the taxpayer is selling any taxable services in the state. Many services are straightforward and are clearly either taxable or not. However, services such as data processing and information services are some of the interesting “catch-all” services now considered taxable by some states.

The Complications
Preparing For A Sales Tax Voluntary Disclosure Program: Best Practices And Strategies

Voluntary disclosure programs stand as important points of resolution for businesses navigating potential sales tax and state income tax non-compliance issues. Understanding the nuances of these programs is crucial for enterprises seeking to rectify their tax affairs. In this article we’ll focus on voluntary disclosure agreements (known as “VDAs” in the state tax arena) as they relate mostly to sales tax and state income tax.  Note that each state has its own process for engaging in these remedies and there is no “one-size fits all” although there are similarities among the programs.

We’ll cover some of those nuances here:

1. Understanding Voluntary Disclosure Programs:

2. Risks of Non-Compliance:

  • Overview:
    Explore risks related to non-compliance, emphasizing proactive mitigation.
  • 1. Audits and Investigations:
    Non-compliance increases the risk of time-consuming audits as happens when a state identifies a company as non-compliant before the company is able to come forward voluntarily
  • 2. Financial Penalties:
    Non-compliance leads to financial penalties and interest.
  • 3. Legal Actions:
    Non-compliance may escalate to legal actions.
  • 4. Reputational Damage:
    Non-compliance can harm a business’s reputation.
  • 5. Loss of Business Opportunities:
    Non-compliance limits opportunities.
  • 6. Unpredictable Financial Impact:
    The financial impact of non-compliance is unpredictable.

3. Benefits of Participation:

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How To Make Sure You Are Using Sales Tax Compliance Best Practices

There are a few different ways you can “do” sales tax compliance. Here are the four main ways we recommend, as well as which option is generally best depending on your company’s size and nexus:

  1. Someone in-house does returns manually, which usually means filing each tax return individually via each state’s online portal. This is often a good option for small companies that file in five or fewer states. But companies usually need a better solution.
  2. An outside bookkeeper or firm files returns manually. This also requires them filing returns through each state’s online portal, so it may be a good option for small businesses that file in 10 or fewer states, but much beyond that and it gets cumbersome very quickly to try to keep up with manual filing.
  3. Rely on a completely automated software solution, with very little human interaction. There are multiple software solutions out there that calculate how much sales tax to collect and remit, and automatically file the returns for you. This maybe a good option for middle market companies that file in 10 or more states with relatively simple transactions (e.g. they sell online, high volume, tangible property where most items are subject to sales tax). However, we always courage our clients to consider all the ramifications of automation and then also consider the human element. Sometimes the biggest hurdle is the software implementation!
  4. Work with a compliance provider, which uses the software but also offers more interaction with a real person on the team. This is usually a good option for or larger companies filing in 10 or more states with more complicated transactions (e.g. they sell more technology products, software or SaaS that are subject to interpretation about taxability), higher end products with a larger cost per product and lower volume. Again- a well thought out combination of software and human intelligence is often the best strategy. In addition to picking the option that will lead to most effective sales tax compliance, you’ll want to weigh the cost involved with each of the above options.

Miles Consulting Group can help you evaluate the best compliance solution as there are more factors than the ones included above—there can be a wide variety of factors to consider.

CONTACT US TODAY to determine the best sales tax compliance solution for your business! Monika Miles Consulting.

Which Activities Cause State Tax Nexus Issues?

As states are becoming more aggressive with respect to tax collection, they are also broadening the activities that cause nexus, or taxable presence, for companies. This is important because once a company has nexus, they can be subject to sales tax collection, income tax reporting and other taxes as well.

Some activities that may cause nexus (and therefore state tax reporting issues) include:

  • The hiring of an employee
  • Contracting with an independent contractor
    Maintaining inventory in third party warehouses
  • Owning property or renting office space
  • Exceeding a certain threshold of sales or transactions in a given state (see the Wayfair case discussion)
  • Using fulfillment services like Fulfillment By Amazon (FBA) or similar services which place inventory in third party warehouses in different states

Once a company begins doing business in a state, we assist with procedures for filing necessary sales tax and income tax returns. We also help with apportionment reviews and general compliance.

On the income tax side, one hot topic is properly sourcing revenue for service-based companies. Many states have embraced a concept referred to as “market-based sourcing” for service revenues. That generally means that the revenue will be recognized in the state in which the value of the service was received. What that means can vary by state.

Have a question? Contact Monika Miles Consulting.

The Role Of Technology In Streamlining Ecommerce Sales Tax Compliance

It has been over 5 years since the pivotal ruling essentially creating the concept of “economic nexus” thresholds in South Dakota v. Wayfair (US Sup Ct – 2018). And yet, we still field questions from e-commerce companies daily about how to navigate compliance. Ecommerce businesses operate in a complex landscape where sales tax compliance is of paramount importance. Compliance is not merely a legal obligation; it is a critical component of financial stewardship. Failing to comply with sales tax regulations can lead to financial penalties, audits, and a negative impact on the business’s reputation.

As ecommerce transactions cross state and international boundaries, understanding and adhering to the various tax laws and rates remains a formidable challenge.

This article explores the significance of sales tax compliance for ecommerce businesses and how both technology and the human element of a consultant play a pivotal role in simplifying this intricate process.

Here’s what we’ll be covering:

  1. Challenges Faced by Ecommerce Businesses in Sales Tax Compliance
    • Specific challenges in sales tax compliance:
      • Varied Tax Jurisdictions: Navigating different tax rules in various locations.
      • Tax Rate Determination: The complexity of calculating accurate tax rates.
      • Handling Exemptions: Managing exemptions for certain products or transactions.
      • Evolving Regulations: Adapting to changing tax laws.
      • Borderless Commerce: Coping with the complexity of cross-border transactions.
      • Accurate Calculation, Filing, and Record-Keeping: Ensuring precision in tax-related tasks.
      • Non-Compliance Consequences: Consequences of failing to comply with tax regulations.
  2. The Evolution of Sales Tax Software for Ecommerce
    • The evolution of sales tax compliance methods:
      • Traditional Sales Tax Compliance Methods: Manual and spreadsheet-based approaches.
      • Introduction of Sales Tax Software Solutions: Automation of the compliance process.
      • Advantages of Using Sales Tax Software for Ecommerce: Benefits of using software solutions.
  3. Key Features of Sales Tax Software for Ecommerce
    • Essential features of sales tax software:
      • Tax Calculation Software: Automates precise tax calculations for each transaction.
      • Tax Filing Software: Streamlines the submission of tax returns.
      • Tax Management Platforms: Centralized hubs for monitoring compliance.
  4. Beyond the Software: The Role of Consulting in Sales Tax Compliance
    • The importance of consulting in sales tax compliance:
      • Importance of Expertise in Tax-related Challenges: Expertise in complex tax laws.
      • How Consulting Can Complement Sales Tax Software: Combining expertise with automation.
  5. The Human Touch Before Technology
    • Emphasizes the role of a knowledgeable consultant before implementing automation solutions in tax compliance.

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Why Is A Nexus Review Important?

A nexus study and taxability review determine where a company might have state tax exposure and the extent of that exposure. We work with our clients to identify their activities in various states and analyze the types of transactions engaged in within those jurisdictions.

Determining exposure before a proposed acquisition is good business. We also assist in determining possible exposure before a state comes to audit. And finally, we bridge the gap with respect to financial statement disclosure.

As part of each project, we work with clients to answer the following types of questions:

  • What is nexus?
    • Do we have physical presence nexus?
    • Do we have economic nexus?
  • Is my product or service taxable?
  • Are there any available exemptions (e,g, food or medical exemptions, sales to qualified non-profit entities)?
  • Must I start collecting and remitting sales and use tax?
  • I’ve collected tax from a given state and have not remitted it-what now?

Once we determine possible exposure, we assist clients in receiving maximum benefit from available amnesty programs, contract for voluntary disclosure agreements, work with their customers to determine if they have self-assessed taxes (and can therefore reduce exposure for our client) or simply document their exposure.

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State Nexus Issues

As states are becoming more aggressive with respect to tax collection, they are also broadening the activities that cause nexus, or taxable presence, for companies. This is important because once a company has nexus, they can be subject to sales tax collection, income tax reporting and other taxes as well.

Some activities that may cause nexus (and therefore state tax reporting issues) include:

  • The hiring of an employee
  • Contracting with an independent contractor
    Maintaining inventory in third party warehouses
  • Owning property or renting office space
  • Exceeding a certain threshold of sales or transactions in a given state (see the Wayfair case discussion)
  • Using fulfillment services like Fulfillment By Amazon (FBA) or similar services which place inventory in third party warehouses in different states

Once a company begins doing business in a state, we assist with procedures for filing necessary sales tax and income tax returns. We also help with apportionment reviews and general compliance.

On the income tax side, one hot topic is properly sourcing revenue for service-based companies. Many states have embraced a concept referred to as “market-based sourcing” for service revenues. That generally means that the revenue will be recognized in the state in which the value of the service was received. What that means can vary by state.

Have a question? Contact Monika Miles and Team.

Navigating The Risks And Benefits Of Voluntary Disclosure Agreements

Addressing tax compliance isn’t just a legal responsibility; it’s a strategic imperative in business. A Voluntary Disclosure Agreement (VDA) stands as a powerful tool for businesses seeking to correct past mistakes and pave the way for a future marked by fiscal integrity. In our experience, our clients tend to engage in VDAs for both of these reasons. They want to do “the right thing” while minimizing their tax burdens for retroactive liabilities.

If that all seems little weighty for just an article intro, don’t fret – here at Miles Consulting, we endeavor to make it all a little less scary. This article delves into the risks, benefits, and nuances of these VDAs, illuminating the path toward informed decision-making.

Here’s what you’ll find:

1. What Is a Voluntary Disclosure Agreement (VDA)?:

A VDA is a contract between a company and a state that outlines the benefits for both parties when a taxpayer rectifies retroactive tax exposure.

2. The Advantages of Voluntary Disclosure:

Voluntary disclosure programs provide reduced penalties, limited lookback periods, reduced audit exposure, and confidential handling of the disclosure process.

3. Eligibility and Participation Requirements:

Businesses must meet specific criteria, including full disclosure and compliance with payment terms, to participate in voluntary disclosure programs.

4. Unlocking the Benefits of Voluntary Disclosure:

Voluntary disclosure programs minimize financial impact, reduce audit exposure, and uphold business integrity through confidentiality.

5. Navigating the Risks of Disclosure:

Businesses must be aware of potential risks such as unintended audits, unanticipated tax liabilities, and data sharing between states when entering voluntary disclosure programs.

6. Evaluating the Path Forward:

A careful evaluation involves identifying issues, assessing benefits, evaluating risks, and conducting a comparative analysis to determine the most suitable compliance path.

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How Practical Is Artificial Intelligence For Sales Tax? The Future of Sales Tax In The United States

The world of taxation is evolving rapidly, and artificial intelligence (AI) is playing a significant role in this transformation. AI is poised to make a substantial impact in the sales tax field. In the United States, sales tax has long been a complex, data-intensive, and ever-changing landscape for businesses and consumers alike. AI is affecting the way sales tax is collected, managed, and enforced, which will have practical implications for the future of businesses operating in the U.S. Here’s how… 

1. Enhanced Accuracy And Efficiency 

One of the most immediate benefits of AI in sales tax is the improved accuracy and efficiency it brings to the record-keeping tasks. Traditional manual methods of pulling recordings and searching for small details are time consuming and prone to errors, which can result in costly audits and penalties for businesses. AI-powered software can automate the process of pulling information from documents such as invoices and exemption certificates to streamline and speed up time-consuming record keeping tasks and pulling records for audits. This can also reduce the likelihood of errors and ensure that businesses are in compliance with sales tax regulations. But as always, we recommend that you double-check your work! 

 2. Assisting In Research  

So much of our time working in sales tax ends up being spent on research. Whether that is determining sales tax rates, economic nexus thresholds, taxability of different types of items, or one of the many other details relevant to staying compliant. AI can be helpful in this process! AI is best used to get leads in researching the taxability rules of different items. If you begin selling a new product in a new state, AI can set you in the right direction. Then you can continue your research built on that foundation. Think of AI as a guide that can set you in the right direction but does not complete the full journey for you.  

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Thinking About An Acquisition? Do Your Due Diligence!

When entertaining discussions about mergers and acquisitions ( M&A ), due diligence practices as they pertain to the state tax side of a deal are a key item. We frequently consult with clients that are in the process of either acquiring another company or looking to be acquired. In either case, the client wants to be aware of any potential state tax exposure areas so they can move forward appropriately and correctly negotiate the deal.

Often however, the due diligence process is the first time the company has addressed the multi-state landscape. Sometimes M&A deals fall apart because a target company does not have its sales tax house in order. If a suitor company does its due diligence and finds significant exposure related to years of non-compliance with sales tax collection or income tax filing, it can either derail an entire deal or significantly impact the purchase price.

What Are Some Due Diligence Questions To Ask If A Company Is Being Acquired?

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Utah And Nevada and Sales Tax - SaaS, Software And Fun Facts

This month, we continue our blog series with a contrast of a couple of western states – Utah and Nevada – specifically their treatment of technology items for sales tax purposes.

Wait! Already know you need help with Utah or Nevada issues? Please reach out to us at info@milesconsultinggroup.com

Software as a Service (SaaS) in Utah vs. SaaS in Nevada

Software as a Service (SaaS) is subject to sales tax in several jurisdictions across the country. Approximately half of states do tax the SaaS revenue stream. As you’ll see below, these two states differ regarding their treatment of sales tax for SaaS.

Cloud Computing Services are subject to sales and use tax in Utah.

Utah imposes sales and use tax on license fees for remotely accessed prewritten software, including hosted software, application service provider software, software-as-a-service (SaaS), and cloud computing applications, purchased for use of the software in Utah.

SaaS is exempt from sales and use tax in Nevada.
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New York & New Jersey And Sales Tax – SaaS, Software & Other

This month, we continue our blog series with a contrast of a couple of Northeast states – New York and New Jersey – specifically their treatment of technology items for sales tax purposes.

Wait! Already know you need help with New York or New Jersey issues? Please reach out to us at info@milesconsultinggroup.com

Software as a Service (SaaS) in New York vs. SaaS in New Jersey

Software as a Service (SaaS) is subject to sales tax in several jurisdictions across the country. Approximately half of states do tax the SaaS revenue stream. As you’ll see below, both states differ regarding their treatment of sales tax.

Cloud Computing Services are subject to sales and use tax in New York and New York City.

The sale to a New York purchaser of a license to remotely access prewritten software is subject to tax and the sale is sourced to the jurisdiction in which the purchaser uses or directs the use of the software.

SaaS is exempt from sales and use tax in New Jersey unless it meets the definition of an information service. SaaS is not considered a transfer of tangible personal property and is not an enumerated taxable service.
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