IT businesses not only have a responsibility to their clients to follow the laws regarding sales tax on software but also to themselves. The executives running IT companies must keep the enterprises free of avoidable problems. Staying free of tax compliance controversies could prevent an IT company from dealing with time and cost-consuming audits. Complying with tax codes in multiply states, however, could become a challenge. An IT company that sells software across state lines may need to pay tax on some or all sales. Ultimately, state law describes what is taxed and how much the tax is. 
The categories of taxation vary. IT sellers should look to see if canned or custom software is taxable, and whether they are taxable when tangible personal property or when they a downloaded version. And what about the customization of canned software? Some states would tax these sales. Software as a Service (SaaS) may or may not be taxable depending on the state. Further rules and requirements may exist that complicate collecting sales tax on software. An alternative tax rate may be assessed. Louisiana charges a 3% alternative rate, and Connecticut charges 1%. And then there is Arizona, a state that charges tax on the rental of software. Software sellers can take some solace in the fact that the internet provides many resources that list current tax requirements. The primary word to understand is “current.” Sales tax on software comes into existence when state legislatures pass laws establishing taxes if any. These laws may undergo revisions, amendments, and repeals at any time. Screen-capturing a detailed reference map for sales tax is not a “one-time” step to take. Sellers must be mindful that laws and tax obligations could change. One governor could run for election with the promise of cutting sales tax for consumers while another candidate might run with a commitment to raise revenues to pay for budget shortfalls. The onus falls on the software seller to know what taxes he/she must collect. A failure to collect the proper amount of sales tax might create problems. Collecting the tax and not submitting it timely could land a company and its executives in further trouble. Software sellers may need professional assistance with tax compliance issues. Fusion CPA handles many different types of tax duties on behalf of clients. Working with an established accounting firm may provide solutions to software and other sales tax concerns.
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.