Do NYC Based SaaS Companies Need To Charge Sales Tax?
If you have an enterprise SaaS company your invoices are probably (hopefully) pretty big. Maybe somewhere between one thousand and $500 thousand or more. It's such a burden to charge sales tax: you have to remember to add it on the invoice, burden the customer with an additional expense, collect it, submit it quarterly and file tax returns.
Also, with sales tax ranging from $88.75 on a thousand dollar invoice to $44,375 on a $500 thousand invoice, it's no wonder that you want to make absolutely sure that you need to charge sales tax.
I mean really, how do you even know if you are supposed to be charging sales tax?
Many SaaS startups do not know if they should be charging sales tax and simply do not charge it. Ignorance is basically innocence, right?
Not really. New York State does not accept not knowing that you were supposed to charge sales tax as an acceptable excuse. In fact, you may be subject to fines and even a jail sentence if you
"fail to make, render, sign, certify, or file any return or report."
Wow. New York is no joke when it comes to sales tax.
New York is also pretty clear about what is taxable:
"Prewritten computer software is taxable whether sold:
- on a disk or other physical medium;
- by electronic transmission; or
- by remote access."
This is difficult to argue: computer software, whether it is sold via a physical medium, electronic transmission or remote access is taxable. Your SaaS probably fits into that definition. New York State also goes on to explain that many computer software related services, including training, consulting, installing, etc are not taxable. (Small win! for those with professional service revenue.)
If you are in charge of sending out invoices at a NYC based SaaS company and you are not sure if you should be charging sales tax, you need to ask your accountants. They may need to see a demo of your SaaS to better understand your product and determine whether or not you should be charging sales tax. If your accountants do not know, you need to hire a new accounting firm because the one you have are not the right fit for your needs.
How does sales tax work?
There is a lot of complication due to the fact that laws are different in different states. And sales tax is one of those victims of weirdly different laws in different states.
Companies must charge sales tax according to each states' laws. The law says if you have "nexus" in their state and what you are selling is taxable, you must charge sales tax to those customers who are also located in that state. So first you must meet the product/service requirement if it is taxable, then you have to have nexus in that state and finally be selling to companies located in that state.
Each state defines cloud based computer software differently and therefore your SaaS may be taxable in some states while not in orders.
What is nexus? Nexus is how each states defines the criteria of whether or not a a certain company is "conducting business" in their state. Conducting business is usually defined as: having a physical office location in the state, having at least one W-2 employee that works from that state, your company is earning a certain amount of revenue in their state, or you send sales or client service employees to the state to prospect new clients or support current clients.
You must research each state to know what threshold they consider doing business in their state. Many states have all of this information online. You can google “doing business in <state> nexus” to find more info. This will usually take you to the state’s department of finance/revenue/taxation and give you details about the threshold. Although many states will be more complicated than that.
How does New York State define nexus?
-You have an office, store or warehouse and sell taxable products or services to people or companies based in NY.
-You send salespeople, contractors or anyone else into the state of NY to solicit business.
-You solicit business through catalogs or advertising material. (I’m not even sure what this means...if you might fit into this category you need to check with your accountant).
-You make sales to customers based in New York and deliver the products into New York using you own vehicles at least 12 times per year.
If you are reading this, however, it is probably because you have an office in New York or are sending salespeople to New York.
Once nexus is determined you will need to charge sales tax to those customers that are located in that state on applicable products and services.
How do you get set up to charge sales tax in New York?
Register as an entity doing business in NY. If you have not already done so, set up your company as a domestic entity or foreign entity (if you are a Delaware or other corporation) in New York. You can search for your company here to make sure you are set up with the most updated address.
- Complete Certificate of Authority checklist:
- Apply for Certificate of Authority. To apply for Certificate of Authority go to the NYS License Center website: Select the Business link on top of the page > Log in or create an account > Select Apply now for a new license or permit > Search for Application for a Certificate of Authority
- Create a separate bank account for sales tax collections. Although, this is not required, New York State suggests that you do this to ensure that you do not use sales tax money to fund operations.
- Create a compliance calendar with the due dates for NY biennial report filing and quarterly tax filings to make sure you send in collected sales tax and filings on time.
- Tell your clients that you charge sales tax. Your clients may request that you provide them with a copy of the Certificate of Authority, which is a document you will get from NY state.
- You should be charing 8.875% on taxable products and services.
Once your business starts growing you may find that you need to charge sales tax in other states and want to use a tax tracking software like Avalara. Here you can check out a video from Avalara about what happens if you do not remit the sales taxes you collected to New York State.
Happy SaaS-ing and Sales Taxing.
This post is meant for informational purposes to help give you a topical understanding about SaaS businesses charging sales tax in NY and is not legal or accounting advice. Consult your accounting firm regarding your company’s specific situation.
For more insight or help managing startup’s finances contact me at me (at) katiebronnenkant.com.