The continued challenge of sales tax compliance: attention SaaS companies

On June 14, 2022, the U.S. Senate Committee on Finance held a hearing to examine the continuing impact of the U.S. Supreme Court decision in South Dakota v. Wayfair Inc. (2018) on small and remote businesses. The decision in Wayfair stated that physical presence is no longer required for a state to impose sales tax on a remote seller. This has impacted tax compliance for any business operating across state lines. Wayfair allows states to define a sales threshold (by either dollar amount or the number of transactions) which will trigger a collection requirement. As a result, each state and local municipalities therein may create different threshold rules, various definitions of products and services and different sales tax rates and exemptions. Small and remote businesses have been left to unravel this web of very complex laws and expend significant resources to comply and pay these tax liabilities. With the boom of e-commerce companies, an increase in sales of products and services online as a result of the COVID-19 pandemic and new structures of remote workers in other states, small businesses have been forced more than ever to re-examine their tax compliance.
 

Sales tax is a tax on consumers collected and remitted by retailers, but remains a liability to retailers if uncollected. While sales tax applies to most tangible property, it can also apply to certain services. For example, companies that sell software as a service (SaaS companies) face a challenge when it comes to understanding its tax exposure. A company selling tangible property may more easily be able to track where its items are shipped, whereas the use of a SaaS is not so easily identifiable. SaaS companies may have a contract with a customer’s headquarters which in turn uses the software across locations in multiple states. Depending on the specifics of the underlying SaaS products, the sale and use of it can result in significant tax costs.

 

Whether Congress takes action to attempt to streamline or incentivize states to simplify their structures remains to be seen. However, businesses of all types must continue to keep careful watch on their sales tax compliance as e-commerce continues to evolve.
 

The corporate transactions attorneys at Chuhak & Tecson can recommend best practices.