As companies increasingly transition to cloud-based solutions, understanding the complexities of sales tax on these digital services becomes crucial. In many instances, companies may be eligible for sales tax refunds, particularly in certain industries and jurisdictions.
Understanding Sales Tax on SaaS
At its core, SaaS offers software applications over the internet, eliminating the need for organizations to install or maintain software on their own computers or servers. This convenience, however, has muddied the waters in terms of sales tax. Since most sellers levy sales tax on invoices for SaaS, confusion arises about its application, particularly concerning the location of the users.
Traditionally, the taxation of physical products is based on the location where the product is shipped. However, with SaaS and other digital services, the “product” is not tied to a physical location; users can access the software from anywhere, including different regions of the United States or even other countries. As a result, sellers often charge sales tax assuming that all users are located at the designated “ship to” address, leading to discrepancies in tax calculation. The good news is that businesses may be able to claim sales tax refunds on their SaaS purchases in certain cases, even more so in certain industries and jurisdictions.
Key Industries for SaaS Tax Refund
Three sectors emerge as major consumers of SaaS products: financial/banking, insurance, and commercial real estate. A striking commonality among these industries is their operational structure. Many of their employees operate outside the company’s home state, yet they utilize the SaaS tools “shipped” to the company’s headquarters. This distributed use of software services, juxtaposed against the traditional tax application, reveals potential opportunities for sales tax refunds.
A Few Jurisdictions of Focus
Two major financial hubs, New York City and The City of Chicago, serve as prime examples of the complexities tied to SaaS taxation. While New York levies a straightforward sales tax rate of 8.875%, Chicago doesn’t impose a direct sales tax on SaaS.
The city introduced a unique Personal Property Lease Transaction Tax (PPLTT) on what they term as Non-Possessory Computer Leases. PPLTT is a lease in which the customer does not have physical possession of the computer. Instead, the customer accesses the computer remotely over the internet. This tax rate is even higher at 9.00% – signifying sizable financial implications for businesses operating within these jurisdictions. These steep tax rates, combined with potential misapplications, suggest significant refund opportunities for businesses in these cities.
If you are a business using SaaS products, you should consider whether you may be eligible for a sales tax refund on SaaS purchases. Leyton can assist you in learning more about the specific rules that apply to your situation.
