Software-as-a-Service, better known as SaaS, is a model of software licensing and delivery that offers applications over the Internet; as a service. SaaS eliminates the need for installation and maintenance of software and enables easy access via the Internet, thereby mitigating the need for and freeing up resources that might otherwise be engaged in complex software and hardware management. Software-as-a-Service enable users to connect and seamlessly use cloud-based apps and provides a complete software solutions that companies and organizations can purchase on a pay-as-you-go basis from the cloud service provider.
Over the recent years, software-as-a-service has become one of the most accessible and universally accepted software model across various end-use industries. But while SaaS has grown in popularity, the legislation has been slow to catchup. There are nearly 15,000 SaaS companies across the globe, however, many of these providers have little knowledge on how to manage, file, and coordinate their taxes. Ignoring the importance of sales tax can incur financial burden on the companies which makes sales tax critical for them to run their business operations smoothly and seamlessly.
Software-as-a-Service produces are a topic of confusion within the tax law – majorly due to the different definitions state to state. The United States categorizes software taxes into downloadable, tangible, customer software purchased, cloud-access software, and customization software configured by the user. It, however, depends on how the state imposes sales taxes to understand how they impact SaaS.
In New York, SaaS and cloud computing are often considered taxable considering it involves a steady revenue stream from the direct use of software or license to use. New York imposes sales and use tax on prewritten computer software because it considers the software to be a tangible personal property. As a result, selling a license to remotely access the software can be subjected to tax and the sale is sourced to the jurisdiction in which the buyer uses or regulates the use of software.
Since 2008, cloud computing and SaaS transactions have been taxable under the state’s sales and use tax law that was implemented by the New York State Department of Taxation. While New York does tax the SaaS, it is imperative to confirm is the definition applies to the services offered by the individual company. For instance, canned or pre-written computer software are included in tangible personal property by the state of New York. Companies can collect sales tax from the buyers by applying tax rate according to the state law wherein the buyer resides. This can happen because there is a possibility of different tax rates for a county, city, or any other local sales.
Software downloads and cloud software subscriptions are also taxable under the state law of New York and the current sales tax threshold in New York is US$500,000. Registration for sales and use tax in New York is more sophisticated but lengthy and requires plenty specific information. This compels companies and organizations to get professional help from tax agents for seamless paperwork and filing. Filing in New York can either be annually, quarterly, or monthly – depending on the value of the company’s sales in the state. However, penalties for non-compliance can incur heavy fine and tax evasion can result in penalties up to 200% of the amount owed.
The tax bulletin published by New York explains how sales tax applies for the sale of computer software and other related services and which services are exempt from taxes. In addition, the advisory posted by the Department of Taxation and Finance in the state of New York explains and clarifies that cloud computing is a non-taxable product and therefore is not subjected to sales tax.
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