In some ways, Texas comptroller statutes are crystal clear about which goods or services require the collection of sales and use tax. However, when it comes to SaaS, cloud computing, and electronically downloaded software, the rules become more complex. When do you need to collect sales tax on these types of transactions?
Here’s what you need to know about the taxability of SaaS in Texas.
SaaS and Cloud Computing Tax Rules: Partial Exemption
In Texas, SaaS (software as a service) and cloud computing are recognized as taxable data processing services. The Texas Comptroller has ruled that providing access to software hosted on a remote server via the internet where a customer may input, retrieve, and manage data is a taxable data processing service. 20% of the value of taxable data processing services is exempt from tax, so effectively, 80% of a company’s SaaS revenue stream is subject to sales tax and must be collected from consumers, respectively.
Downloaded Software Treatment: Taxable
Computer software is considered tangible personal property in Texas, which means the sale, use, rental, or lease of such software is subject to sales and use tax, regardless of the method of transfer.
Make sure invoices show the appropriate sales tax rate applied to the reduced tax base. Some taxpayers have asked if it is permissible to adjust the tax rate to “come up with the right amount of sales or use tax.” It is not permitted.
Make sure invoices show the correct rate applied to the proper tax base (if you explain how the tax is calculated).
As a SaaS provider, you must monitor the ever-changing sales tax landscape as more states are subjecting to SaaS to sales and use tax. In Texas, SaaS and cloud computing are recognized as taxable data processing services.
If you need help with your taxes, books or want to create a plan to save on taxes, schedule a free consultation with one of our experts today.