In some ways, state statutes are crystal clear about which goods or services require the collection of sales and use tax. However, when it comes to Software-as-a-Service (SaaS), cloud computing and electronically downloaded software, the laws become a bit more confusing. When does your company need to collect sales tax on these types of transactions?

To further complicate the issue, the recent Wayfairdecision will affect traditional multi-state sellers (including those that generate revenue from SaaS and software) – not just online sellers. By making nexus easier to establish, companies will need to consider the taxability rules of SaaS in each state in which they have nexus even more closely.

Today is the second in a series that covers how various states across the country define SaaS, cloud computing and electronically downloaded software. Read our first post to find out how California, Utah and Washington handle them, and keep reading for three states in the Southwest: Colorado, New Mexico and Texas!

SaaS And Cloud Computing Rules In Southwestern States

Colorado: Nontaxable

In Colorado, computer software is not taxable when delivered through an application service provider, electronic computer software delivery, or transferred by load and leave computer software delivery. This includes SaaS, cloud computing, and information and data processing services.

New Mexico: Taxable

Services, including SaaS and cloud computing services, are subject to New Mexico’s gross receipts tax, as long as the services are used in New Mexico. For this reason, the taxability of cloud computing services in New Mexico does not depend on the location of servers from which these services are accessed. For instance, charges to use information or data located on a remote server are subject to tax if the information or data is received in New Mexico.

Texas: Partial Exemption

In Texas, SaaS and cloud computing are considered taxable data processing services. The Texas Comptroller has consistently ruled that providing access to software hosted on a remote server via the internet where a customer may input, retrieve and manage data is a taxable data processing service. Twenty percent of the value of taxable data processing services is exempt from tax, so effectively 80 percent of a company’s SaaS revenue stream is subject to sales tax and must be collected from customers accordingly.

Electronically Downloaded Software Treatment In Southwestern States

Note: For purposes of this article, we address the taxability of pre-written or canned software (versus custom software) that is delivered electronically. Custom software is exempt in most states, regardless of the method of delivery.

Colorado: Exempt

Prewritten computer software delivered electronically is not subject to tax because software that is delivered electronically is not tangible personal property.

New Mexico: Taxable

In New Mexico, receipts from the sale or license of prewritten software delivered electronically are subject to gross receipts tax.

Texas: Taxable

Prewritten computer software is considered tangible personal property in Texas, which means the sale, use, rental or lease of such software is subject to sales and use tax, regardless of the method of transfer.

SaaS and Cloud Computing Vs. Electronically Downloaded Software

Colorado

Because Colorado doesn’t define SaaS, cloud computing or electronically downloaded software as a tangible item, all of them are nontaxable/exempt from sales and use tax in the state.

New Mexico

New Mexico defines SaaS and cloud computing as services, making them subject to the state’s taxes. Electronically downloaded software is also taxable, however it’s not because it’s considered a service; the state defines it as subject to gross receipts tax rather than sales and use tax.

Texas

This state defines SaaS and cloud computing as data processing services, making them subject to the data processing service tax (with twenty precent of the value exempt). While electronically downloaded software is also taxable, the reason is because Texas considers the software to be tangible property as it is stored on an individual’s computer.

Economic Nexus – Proposed Legislation

In light of the recent Supreme Court case (South Dakota v. Wayfair), we expect many states to enact economic nexus standards in the coming weeks and months. Many experts in the state tax field believe, as do we, 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, none of these three states has enacted an economic nexus statute. However, note that Colorado was at the forefront of legislation aimed at requiring out of state sellers who do not register to collect sales tax to report on the activities of their customers in the state.

Are you curious how multi-state tax issues may affect your company, especially in regards to SaaS, cloud computing and electronically downloaded software?

Have a tax question? Contact Monika Miles.