Very likely. Downloadable applications are taxable in 80% of states and cloud-based SaaS products are taxable in about 50% of states.
The sales tax threshold varies by state.
Yes. You owe tax for the sale of cloud software subscriptions to customers in United States.
Yes. You owe tax for the sale of software downloads to customers in United States.
Yes. You owe tax for the sale of eBooks to customers in United States.
Yes. You owe tax for the sale of digital downloads to customers in United States.
The US tax system is perhaps the most complex. Software is taxed differently across states and in some cases even counties and cities will have their own regulations – totaling over 11,000 jurisdictions to be aware of!
The process for registering is different in each state. Some involve extremely long, complex forms to the point where it’s probably easier to get a tax agent to help you.
Most states have a blanket registration that cascades down to cities and counties. However, there are some exceptions, called home rules. In states like Colorado, for example, Denver has a separate registration process – just to keep things interesting!
You’ll need to file and remit your sales taxes for every state you are registered with separately.
Each state will have its own rules on how often you need to complete this process. In some, it’s a set filing and remitting frequency, for example, quarterly or annually, whereas in others you have to file and remit monthly when your sales into that state reach a certain threshold (we did tell you the US is the most complex!).
Each time you file, you’ll need to make sure you’ve calculated how much tax you owe based on the sales tax rates that are in place when the sale is made. Some jurisdictions will notify you by email that something has changed where others still prefer post – which, if you aren’t based in the US and don’t keep up with the latest changes, can mean you might owe more tax than you have actually collected from your customers.
Unsurprisingly, the penalties for non-compliance vary by state too.
The penalties are usually more severe when they are given as the result of an audit, where a business has evaded its tax liabilities.
However, in some states (New York being one example) a late payment can see you served a heavy fine, with interest on the tax owed. This might not seem like such a problem but it means even if you send a payment on the day it’s due, it could be deemed late because you need to allow time for the department of revenue to receive and process the funds.