SaaS Sales Tax: Part I – Nexus
Contributing author: Steven Claflin, Manager SALT (State and Local Tax)
In light of the 2018 Wayfair decision and the rise in remote workers since Covid, a technology company’s nexus profile has dramatically changed over the years. These issues might not be unique to the technology industry, but they certainly apply to most companies in the industry.
Economic Nexus – It’s been almost 6 years since the Wayfair decision, so most sellers are aware of what economic nexus is and the various thresholds. However, as applied to the technology industry, a few complications exist:
- Rapid Growth – Unlike some other industries, sellers in the Technology space can grow exceedingly quickly. The nexus profile and risk for not collecting for a $1M in annual revenue seller is drastically different than for a $20M in annual revenue seller. Therefore, these sellers need to be continually monitoring for nexus creating activities.
- Applying Thresholds – Most state economic nexus laws were written to apply to ecommerce sellers that ship product around the country. Whether an annual license is a single sale or 12 different sales because of how it is invoiced is going to depend on a state’s specific guidance. Further, a seller must properly source their sales to determine nexus – an issue discussed in the next section.
Remote Employees – It’s quite common for a technology company to have employees throughout the country (or even the World) working remotely. Most states say that regardless of the remote employee’s position, they are creating a market for the seller in that state and thereby have nexus for sales tax purposes (and likely income/franchise tax purposes as well). Of course, when hiring new talent to your team, you probably aren’t thinking about the sales tax obligations.
So what’s next? You’ve determined that you have nexus – how do you source your sales to the various states? Keep reading! —> SaaS Sales Tax Part II: Sourcing Sales
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