As we all know, business technology is changing at the speed of light. With COVID-19 risks and stay at home orders, people all over the world are re-thinking the way they do business. Technology issues that once seemed somewhat complicated from a sales tax standpoint– software delivered on a diskette vs. load and leave vs. electronic download and similar issues – now seem less complex compared to sales tax issues surrounding cloud based (remotely accessed) software. Throw into the mix products such as data and document storage, data processing, remote consulting and monitoring services, information services, and digital products, such as books and music, and you have a lot of complexity, particularly on a multistate basis.
Businesses that are either buying or selling technology should be aware of the basic issues surrounding the sales taxability of these products.
What am I actually buying/selling?
As an example, many clients tell me they are selling remotely accessed software, only to find out after a deeper dive into the product they were actually selling a variety of other products and services, such as data storage, taxable telecommunications services, data transcription services, and information services.
Why does it matter?
Remote access software is taxable in many (but not all) states. However, Tennessee (for example) taxes remote access software but does not tax information services, data processing services, or digital storage services. Being able to distinguish the difference will enable you to correctly determine the taxability of your product.
How do I determine the type of product my company is selling?
- What does the contract say? Note – contracts and invoices don’t always agree.
- What does the technology reveal?
- What is the purchaser’s true objective/primary purpose?
- What do the seller’s website and/or advertising materials say (often very different from the nuts and bolts of what is being provided).
- Where is my product being “delivered?” Which state would have the right to the tax, if taxable.
Don’t make blanket assumptions about the taxability of your product.
States vary greatly in the application of sales tax to cloud based/electronic/digital products.
Avoid bundling clearly taxable products with clearly non-taxable products.
You may create a huge liability if products are not being taxed correctly.
Clear Product Descriptions
Tax auditors will look at your website and review your contracts (as well as invoices and other documentation). So be clear and consistent about your product description.
Download our Sales Tax and Cloud Based Technology sheet here.
If you need assistance with this topic or other sales tax topics, contact Rhonda Hampton, CPA at email@example.com or call 423-702-7939 (direct).