Technology companies: 3 keys to sales and use tax management
INSIGHT ARTICLE |
By 2018, the use of digital goods and services have become ubiquitous in the business community. For businesses operating in the technology sector, digital goods have penetrated every facet of day-to-day operations, from increasing employee efficiencies, changing the customer experience, and dictating the products and services offered. From downloadable software to ebooks, music and subscription services, digital products and services are a pervasive part of our lives, representing tremendous opportunities for many technology companies.
With the new digital landscape, however, come challenges particularly regarding sales and use tax compliance. At the core of these challenges are: (1) the lack of clarity of where the actual sales transaction has taken place (what’s called “sourcing” for tax purposes); and (2) what are the related tax considerations for that sale and use of the product or service. In the case of software-as-a-service, for example, the product and service may have been purchased in one state and used by employees in another state. Transaction or service data for those purchases may be stored on servers in multiple states and accessed through the cloud. These remote transactions, and similarly complex multistate transactions, cause confusion on where nexus has been established, and ultimately, whether the transaction is subject to tax.
How can technology businesses sort through the uncertainty and be proactive with their sales and use tax obligations? Note the following three key areas technology companies should consider.
Assess: Make sure your tax department or tax service providers thoroughly understand your business, including the jurisdictions in which you operate and where your products or services are sold, what are your revenue streams, where your software is hosted and downloaded, how products and services are delivered, what support is available for technical help and upgrades, and how your sales are invoiced.
Identify: Examine where nexus has been established, including identifying where servers and software locations are, as well as where employees and customers are located. Determine where your sales are sourced for sales tax purposes, as well as how sales receipts are sourced for income tax purposes.
Plan: Develop a tax policy for your technology business to address current digital goods and services activity. This proactive approach puts your organization in a better position for future business opportunities, like a merger or acquisition, and could address a state audit, if needed. In addition, don’t forget to address your risk areas and opportunities for improvement, and implement best practices for optimal tax management. Document changes and integrate into internal controls as appropriate.
Finally, as an added consideration when performing your sales and use compliance, be aware of changing state tax laws and pending legislation. State tax law and policy is continuously evolving. Staying ahead of new and emerging laws that may impact the taxation of digital goods and services should be a priority of any technology company’s tax department.
For more on this topic, check out the following resources. Questions? Contact us.
50 states mean 50 sets of rules. We look at why state compliance is difficult and what you need to know when operating in multiple markets.
Companies should understand how states collect millions in unpaid sales tax from internet sales and other remote purchases.