How Sales Tax Nexus Is Affecting Tech Companies In The United States?

How Sales Tax Nexus Is Affecting Tech Companies In The United States?

Written by Deepak Bhagat, In finance, Published On
August 23, 2021
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There is no doubt that tech companies are leading the charts when it comes to Fortune 500 rankings. In the last few decades, they have been able to revolutionize our lives, markets, and stock exchanges. They continue to be some of the most valuable companies in the world.

When it comes to filing taxes; tech companies, digital media corporations, and telecom majors often find themselves facing complicated issues, paperwork, and filings.

While there has been awareness in this field, a lot has changed post the monumental Wayfair Versus State of South Dakota judgment of the Supreme Court.

How Sales Tax Nexus Is Affecting Tech Companies In The United States?

In this article, we are going to look at some of the major ways, sales tax nexus is affecting tech companies in the United States. We will also discuss why sales tax compliance outsourcing is the best solution for tech companies.

  • Sales Tax Nexus: Meaning and Definition

Following the judgment of the US Supreme Court in the Wayfair Versus State of South Dakota case, sales tax nexus has come to be defined as a form of way that a business has to pay if it is doing operations in a specific state.

The nexus means that a physical presence is not the only requirement that necessitates the payment of sales taxes. Online presence, a specified number of sales made/consumer billed and a level of revenue earned is what determines sales tax nexus terms and rulings.

However, it should be pointed out that there are no uniform sales tax nexus norms that govern all the states of the American Union. The US Supreme Court has left it to the states concerned to fix the terms and payment details according to their own wishes. This is one area that results in complications and confusion for the companies concerned.

  • Tech Companies and Sales Tax Nexus: What you need to know

When the Supreme Court pronounced its judgment in the Wayfair Case, many tech companies thought that it would be difficult to do the same for intangible goods. The thinking behind it was that digital products like software, waves, and SaaS would be difficult to tax as they are not tangible in nature.

However, states realized that this is a loophole. The Supreme Court in its ruling emphasized that physical presence was not the only market that should compel the payment of sales taxes. It stated that any presence, that includes selling to the citizens of a specific state made the business fall under the purview of paying sales tax nexus.

If you did not have a physical office or a warehouse or workers in a state running your operations. If you were selling digital products to citizens of a state and charging them you would have to pay sales tax nexus.

Tech businesses that came under this new ruling were-

  • SaaS businesses
  • VoIP providers
  • Ecommerce platforms
  • Cloud-based solutions providers
  • Streaming platforms and media
  • How the Sales Tax Nexus was Fixed for Tech Businesses?

While states have been left free to decide on the exact parameters of when the nexus will come into play, we will try to explain the same using the Supreme Court ruling in the Wayfair versus State of South Dakota case-

  • Gross Sales Calculator- The most common calculator for gross sales takes into account an amount of $100,000 or 200 annual transactions and bills in revenues. If a tech business crosses any of the above-mentioned parameters, then it has to start paying sales tax nexus.
  • Definition of Digital Products- both Software-As-A-Service (SaaS) and Infrastructure-As-A-Service (IaaS) have been brought under the purview of digital products. This also includes a connection that is established if a tech business has remote working employees that are working from home.
  • Categories of Intangibles- some states like the District of Columbia have created specified documentation that lists businesses and their products. This includes audio files, visual media, e-books, and more in the list of categories and products that can and should be taxed.

The Bottom Line

For tech businesses, all this means investing a lot of time, energy, and effort. These are commodities that any tech CEO or Founder would want to invest in building their organization rather than filing sales tax nexus paperwork. This is one major reason why outsourcing sales tax requirements to experts is the best solution for tech businesses. If you have any more questions, you would like to know about nexus laws, let us know in the comments below.

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