If you sell SaaS in the Empire State, you might need to collect and remit sales taxes.
New York taxpayer guidance says, “Prewritten computer software is taxable as tangible personal property.”
Navigating New York’s SaaS Sales Tax Rules
If you’re creating custom software on a per-client basis, it’s not subject to sales tax. But if that pre-created software gets sold to a second client, that second sale requires sales tax.
Services like installing, servicing, and troubleshooting software are also exempt, but you need to be sure to make them a separate charge when invoicing the client.
To make matters even more complicated, New York determines sales tax based on where the user is located when they access the software. Since different cities and counties in New York have different tax rates, you need to track the “location from which the purchaser uses or directs the use of the software.”
Fortunately, New York has a relatively high economic nexus threshold. You can skip the sales tax burden if you have sales of less than $500,000 and fewer than 100 transactions.
If your SaaS product is subject to sales tax, the statewide base tax rate is 4%, but local taxes from both cities and counties also apply. On average, our partner Numeral reports that rates average out to 8.53%.
You can register as a sales tax vendor online. Then, the state’s “Welcome, New Vendors” page should help you figure out your specific filing and recordkeeping requirements.
If you need some motivation to get compliant in the Empire State, the Department of Taxation and Finance has the fines and penalties outlined for you.
Getting the help you need to navigate sales tax requirements
SaaS sales taxes can vary from state to state. There’s clearly a lot to navigate here.
Companies that try to manage it on their own often end up overwhelmed — and potentially in compliance trouble. To avoid that, we recommend starting with help from your CPA, then scaling up to a sales tax platform when it’s right for your business.
Start with your CPA
Schedule some time with your accountant to talk through your company’s specific sales tax implications. Come to that meeting with a list of all of the locations in which you’re currently selling your SaaS product(s).
Your accountant can help you determine where you’ve established a nexus. Then, they can work with you to get appropriately registered, manage any taxes you haven’t collected/remitted, and get compliant moving forward. The sooner you do this, the easier and cheaper it is.
Plus, your accountant might be able to give you some good news.
We recently worked with a company that sells 3D assets used in video games. They sold an asset to a customer in Washington, which on the surface looks like it would be subject to sales tax. But the Washington Department of Revenue says, “Services that are primarily the result of human effort performed in response to a customer request are not considered digital automated services (DAS).” That meant that the custom asset fell outside Washington’s sales taxable categorization. As a result, that transaction wasn’t subject to sales tax.
Your accountant is your first line of defense against sales tax noncompliance — and headache. They can also advise you on other tax considerations. If you need to pay sales tax in a state, you might also need to pay income tax, for example. Start with your accountant to make sure you’re navigating all of these requirements in a way that protects your company.
When to invest in a sales tax platform
A good CPA can help you stay compliant with sales taxes when you’re only selling in a few states. But as your sales volume grows and where you’re selling expands, investing in a sales tax platform can make life a lot easier. We usually recommend exploring this once your revenue is in the range of $1 million to $5 million.
Our partners Numeral and Anrok both offer fantastic platforms that make compliance significantly easier. They can integrate with your billing and payroll systems to check for nexuses, help you register once you do have one, automatically add the appropriate sales tax to invoices, and more.
Platforms do a fantastic job of automating a lot of the work required to manage your company’s sales taxes. That said, you should always keep a human in the loop. Have someone periodically review the data in the platform, whether that’s your CPA or someone in-house.
Also, be sure that any alert emails from the platform are going to an active inbox, and someone is jumping on those notifications. Just because you’ve deployed a sales tax platform doesn’t mean your team will never need to think about these taxes again. In the last five years alone, plenty of states have adjusted their sales tax laws, particularly as they apply to SaaS.
Fortunately, a knowledgeable CPA can keep you informed about any changes and compliant with them. For the support your SaaS company needs to navigate the undeniably muddy waters of software sales taxes, we’re here.
To talk with our SaaS sales tax experts here at ShayCPA, schedule a call with us today.
Disclaimer:
The content provided on this blog is for general informational purposes only and does not constitute professional accounting, tax, or legal advice. Reading or accessing this material does not create a CPA-client relationship, nor should it be construed as a substitute for individualized guidance from a qualified professional. While we strive for accuracy, Shay CPA PC makes no warranties—express or implied—about the completeness, reliability, or timeliness of the information, and we expressly disclaim liability for any errors or omissions. You should not act or refrain from acting based on any blog content without seeking the advice of a qualified CPA or other professional who can address your specific circumstances. Links to external resources are provided for convenience only and do not imply endorsement. Shay CPA PC is under no obligation to update this content and disclaims responsibility for decisions made in reliance on it.