When it comes to Software-as-a-Service (SaaS), cloud computing and electronically downloaded software, do you need to collect sales tax from your customer, or pay use tax on purchases?
Well, it depends. Some states define these as services, tangible property or none of the above; you need to take a look at each state’s statutes, regulations or other guidance to answer the question.
Another important factor to be aware of is the recent Wayfair decision from the U.S. Supreme Court earlier this summer. While it may seem to only apply to online sellers, the ruling will also affect traditional multi-state sellers that generate revenue from SaaS and software. Because the decision makes it easier to establish nexus, companies will need to be very aware of the taxability rules regarding SaaS, cloud computing and electronically downloaded software in any state in which they have nexus.
Today is the third in our series of how various states approach the taxability of SaaS, cloud computing and electronically downloaded software. Keep reading to find out how three states in the Southeast (Florida, Georgia and South Carolina) tax these items, and check out our previous posts details about states in the west!
SaaS and Cloud Computing Rules in Southeastern States
Florida: Nontaxable
Florida has no statutes or regulations regarding the sales or use taxation of cloud computing or SaaS. The state’s Department of Revenue also determined that membership fees to access cloud computing and on-demand software are not taxable as there is no transfer of tangible personal property.
Georgia: Nontaxable
Georgia does not impose sales and use tax on SaaS, cloud-based services or hosting services. Prewritten computer software, delivered either electronically or through “load and leave” is also not subject to tax in the state, nor are computer related services, including information and data processing services.
South Carolina: Taxable
This state taxes charges to access a cloud-based database, SaaS or online information service. This includes legal research services, credit reporting/research services, and charges to access an individual website (including application service providers).
Charges for computer software delivered by an application service provider are also subject to sales or use tax. The South Carolina Department of Revenue considers an application service provider to be sufficiently similar to “database access transmissions,” which were ruled to be subject to sales and use tax.
“Database access transmissions” are defined as the transmission of computer database information and programs by and through a modem and telephone lines, whether automatically transmitted or transmitted as a result of a subscriber accessing a computer, for which charges may be based on the amount of time the transmission is utilized.
Electronically Downloaded Software Treatment in Southeastern States
Florida: Nontaxable
Sales of canned software, electronically downloaded by the customer are not subject to tax in Florida. These sales are not subject to tax because no transfer of tangible personal property occurs.
In addition, licenses for the use of software accessed electronically are not considered sales of tangible personal property, and therefore are not subject to state sales tax, as long as no transfer of tangible personal property occurs as a part of the transaction.
Georgia: Nontaxable
Computer software delivered electronically is not a sale of tangible personal property and therefore is not subject to sales and use tax.
Georgia is very clear that the method of delivery needs be indicated on the dealer’s invoice, purchase contract or other documentation, or the state will assume the transaction was made through a tangible medium.
South Carolina: Nontaxable
Prewritten software delivered electronically is not subject to tax.
SaaS and Cloud Computing vs. Electronically Downloaded Software
Note: For purposes of this blog article, we address the taxability of pre-written or canned software (vs. custom software), which is delivered electronically. Custom software is exempt from tax in most states, regardless of the method of delivery.
Florida
Florida doesn’t tax SaaS, cloud computing or electronically downloaded software because the state doesn’t define any of them as tangible personal property.
Georgia
This state doesn’t tax SaaS, cloud computing or electronically downloaded software either as they aren’t defined as tangible personal property.
South Carolina
While electronically delivered software isn’t taxable in South Carolina, SaaS and cloud computing are considered taxable as they’re similar enough to “database access transmissions.”
Economic Nexus – Proposed Legislation
In light of the recent South Dakota v. Wayfair US Supreme Court case, we expect several states to enact economic nexus standards in the coming weeks and months. We agree with many of the experts in the state tax in the anticipation that states will enact legislation closely resembling the South Dakota statute, which indicates that sales of $100,000 or 200 or more transactions into the state will create nexus and the requirement to collect sales tax in the state.
As of the date of this blog post neither Florida nor South Carolina has enacted an economic nexus statute. However, Georgia enacted a law in May 2018 that was signed by the governor. The state’s law indicates that economic nexus (and therefore a collection requirement) is met if sales into Georgia exceed $250,000 or 200 transactions. The law is effective January 1, 2019.
Have a tax question? Contact Monika Miles
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