Sales and Use Tax for Technology and Computer Science Companies

Sales and use tax regulations are a minefield for technology and computer science companies, with potential risks that go far beyond simple compliance. These taxes touch every aspect of the business—affecting the sale, purchase, and use of software, hardware, and associated services. 

For tech companies, the dangers of non-compliance intensify when operating across multiple jurisdictions. Even a seemingly straightforward software sale can turn into a compliance nightmare as customers tend to be spread across states, each with distinct tax rules, rates, and exemptions. A minor misstep in tax calculation can trigger audits, hefty fines, and even legal repercussions—especially when companies overlook these nuances when generating fast-paced, high-volume online sales. The potential for financial losses due to non-compliance is significant, underscoring the urgency and responsibility of finance and compliance teams.

The rise of the gig economy brings yet another layer of complexity. For tech companies relying heavily on independent contractors, many states now impose sales and use tax on services provided by contractors. For firms managing a broad network of contractors, tracking and calculating these taxes is a logistical and regulatory challenge, with steep penalties for oversight.

In an environment where regulations are constantly evolving, tech companies face significant risks. However, with meticulous compliance strategies and proactive measures, companies can avoid financial losses while safeguarding their operational integrity and reputation. The stakes are high, but with the right strategies, companies can navigate this regulatory labyrinth and avoid disaster in the form of mounting penalties and interest, disrupted operations, and sales and use tax audits.

Sales Tax

Definition

Sales tax is applied to the sale of tangible personal property and specific services. Sellers collect it at the point of sale and remit it to the state.

Applicability to Technology Companies

For technology companies, sales tax applies to:

• Hardware Sales: Computers, servers, peripherals, and other tangible tech products sold to customers. Additionally, it is wise to check the taxability of any maintenance agreements.
• Software Sales: You should determine the taxability of packaged software sold on physical media such as CDs and DVDs and potentially non-taxable electronically delivered software. Custom software developed specifically for a client may be exempt from sales tax in some states, provided it meets certain criteria.
• Tech Services: Certain technology-related services, such as installation, training, and support, may also be subject to sales tax depending on state laws.
• Software as a Service (SaaS): The taxability of SaaS varies by state. Some states tax SaaS as they do tangible personal property, while others exempt it from sales tax. It’s important to understand the specific regulations in the states where your company operates.

Use Tax

Definition

Use tax applies to the use, storage, or consumption of tangible personal property when sales tax has not been collected. It ensures taxes are paid on goods used within the state, including those purchased out-of-state or online.

Applicability to Technology Companies

For technology companies, use tax may apply to:

• Out-of-State Purchases: When hardware or software is purchased from out-of-state vendors without paying sales tax, use tax is due when these items are consumed by your business within the state.
• Self-Produced Software: If a company develops software for internal use and does not pay sales tax on the development materials, use tax may be due on the value of the software.

Exclusions, Exemptions, and Special Considerations

Research and Development (R&D)

• Many states offer exemptions for purchases related to R&D activities. Technology companies involved in R&D should explore these exemptions, which can include hardware, software, and supplies used directly in research.

Manufacturing Exemptions

• Companies that manufacture technology products may qualify for sales tax exemptions on machinery, equipment, and materials used in the manufacturing process.

Resale Certificates

• Tech companies reselling hardware or software can use resale certificates to purchase items tax-free. These items must be intended for resale to customers.

Compliance and Record-Keeping

Importance of Accurate Records

Maintaining accurate records is essential for compliance with sales and use tax regulations. Records should include:

• Purchase invoices and receipts
• Resale and exemption certificates
• Documentation of out-of-state purchases
• Contracts and billing statements

Audits and Penalties

Failure to comply with sales and use tax regulations can lead to audits, fines, and penalties. Regularly review your tax practices and consult with tax professionals to ensure compliance.

Thompson Tax Is Here to Help

Navigating sales and use tax regulations is crucial for technology and computer science companies to avoid costly mistakes and ensure compliance. Understanding how these taxes apply to different aspects of your business, from hardware sales to SaaS offerings, will help you manage your tax obligations effectively.

For specific guidance and advice tailored to your technology company’s needs, reach out to Thompson Tax today. We are your Trusted Tax Advisors.