Sales tax on Web Application

June 25, 2010 1:38 PM

YANMA(You are not my accountant), but do we need to charge sales tax on a web-based monthly subscription, "software as a service" application?

YANMA(You are not my accountant), but my business partners and I have a new product, yay for us! We provide a web-based php application that our clients pay for monthly. Do we need to charge sales tax on those monthly subscription fees? No software is downloaded to the users computers.

Thanks!

posted by maelanchai to Computers & Internet (5 answers total)

This is entirely a function of local law. To even make an attempt at answer your question we'd need to know where you are and where your customer is.

If you're in the US, and if your customer is in a different state than you are, the answer is pretty much "no". But if you're in the same state, then it's a function of state law. (For instance, New Hampshire doesn't have a sales tax.)
posted by Chocolate Pickle at 1:45 PM on June 25, 2010

Yeah it depends on where you have nexus, what your local taxing authority deems as taxable. SAAS is in a grey area between professional services (generally not taxed) and a product (taxed). If you contact your local sales tax office they should be able to direct you but be warned they will err on the side of taxation. If you don't trust them then hire a CPA or a lawyer who can read the laws and write up an official understanding of the position. At least when you get audited later for not charging tax you have that in your pocket.
posted by msbutah at 1:50 PM on June 25, 2010

We are in CO, and we do have CO customers, but none that would ever be in our same city or county.
posted by maelanchai at 1:52 PM on June 25, 2010

That's a bit sticky - you may have to charge the CO customers tax, the rest not. I'm not an accountant or CPA but we've recently dealt with this problem of "professional services" since we show up in a state, render services to a client, and then leave nation wide and have nexus in 4 states. We've had a bit of a fight with our local sales tax commission and every state we do business in insists we setup nexus there. We do not want to and have been able to get away with it nationally except for four states that we do more than just one or two instances of business in. FWIW tax nexus is generally defined by states, not counties or cities. Like I said, I would get the opinion of a tax lawyer or a CPA that you can use to back up your claim that under CO law you are exempt from charging taxes on your product. If other states have not asked you to establish nexus there then you should be ok from them. I would check your top two or three states, depending on how much out of state business you do.
posted by msbutah at 2:21 PM on June 25, 2010

Call up your county services office. They should be able to tell you what services require sales tax, if any do. For my state and county, I have services that are taxable and services that aren't; I just went to them with a list of the things I do and got them to tell me what I need to charge sales tax on. They weren't familiar with my line of work, but I described them and they were able to give me clear answers.
posted by galadriel at 7:16 PM on June 25, 2010