In tax legislation, you'll often find pre-written and non-prewritten (aka custom) software broken down into one of three broad categories. However, only ONE category is relevant to Cloudbeds: the Software accessed via cloud. This article explains all the details about it.
Software accessed via cloud - Background
- This is a software that is accessed remotely (via cloud)
- Customers typically access cloud software by connecting to the internet, using a web browser to navigate to a secure customer portal, and entering unique login credentials
- States define cloud based software, within their respective codes, differently.
- Some states define it as: data processing, data organization, or as tangible personal property
- Currently, sales tax is assessed on SaaS* products in 21 states, all of which have varying tax legislation over SaaS
- Action Item (for Finance and Accounting only): Of the states we have Nexus, determine which assess sales tax on SaaS products (Please check further information about nexus below)
*SaaS = software-as-a-service
Sales tax nexus is the connection between a seller and a state that requires the seller to register, then collect and remit sales tax in the state.
Certain business activities trigger sales tax nexus, including:
- Reaching a certain sales or transaction threshold (economic nexus)*
- Having a physical presence
- Remote activity, establishing quasi physical presence
- Click-through nexus
Nexus is the obligation to register, collect, and remit sales tax in a jurisdiction where it has been triggered.
Action Item (Accounting and Finance only): Determine where we have nexus regardless if that state assesses sales tax on SaaS products.
Trailing Nexus: Nexus may continue even after you cease doing business or having a presence in a state, for a period that can last through the end of the calendar year or even longer.
*Under economic nexus, a taxable connection is established when a company reaches a certain level of economic activity in the state, even if it has no physical presence in the state.
There are four activities that could trigger nexus for Cloudbeds within a state:
1. Economic activity
- Economic nexus laws are now enforced in 43 states
- Economic nexus laws vary from state to state
- Economic nexus can be a sales threshold, a transaction threshold, or both
- Depending on the state, economic nexus considers varying periods when measuring the sales or transactional thresholds, including:
- Previous year
- Current year
- Trailing 12 months
- State-by-State Economic Nexus Laws
2. Physical presence
Physical presence is defined differently by state, and can include:
- Brick -and-mortar location (including renting property)
- Employee activities
- Performance of service
- In certain states, trade show attendance
- State-by-state physical presence nexus laws
3. Remote Activity
- Each state defines physical presence differently
- Physical presence in a state can be established in unexpected ways, including remote activity:
- Nexus is likely to be triggered where there is a remote employee
- However, certain states only consider employees whose job is to exploit that state’s marketplace initiating this particular trigger.
- Other states, like Colorado for example, have stated that nexus can be established when a remote seller has employees in the state, “even if the activities of the employee are completely unrelated to the sales transactions at issue.”
- Several states consider a business to have nexus if it has any representative, agent, salesperson, or independent contractor providing services.
- Remote workers:
- State-by-state physical presence nexus laws
4. Click-through Nexus and Advertising
- Under click-through nexus laws, an out-of-state business establishes nexus through agreements to reward persons in the state for directly or indirectly referring potential purchasers through links on a website (hence the name)
- More than 20 states have click-through nexus laws
- Most have a sales threshold, meaning the referrals must generate a certain amount of sales to trigger nexus
- In most states, referrals must generate more than $10,000 in the preceding 12 months or four quarters
- State-by-state Guide to Click-through Nexus Laws
- More than 20 states have laws that expand nexus trigger events to include advertising, including online advertising, in a state.
- SaaS is taxed differently in each state, and is currently taxed in only 21 states.
- Cloudbeds only has nexus in 10 states that assess sales tax on SaaS products.
Check below the states and their respective guides and sources:
Works Cited: Sales Tax Content
The information obtained to create the content within the Sales Tax Board came from the following sources: