Understanding the specific rules that govern taxation in Mississippi is key to sales tax compliance. This article will explain how to ensure your business avoids errors that could lead to fines or other penalties.
Taxation rules in Mississippi
According to Mississippi’s Senate Bill 2449, SaaS may be taxed as a computer software service, if it is used or accessed within the state (hosted), at the state’s standard 7% sales tax rate. This taxation applies to both business-to-business (B2B) and business-to-consumer (B2C) transactions. These rules, which went into effect on July 1, 2023, were implemented as a way to address gaps in previous tax laws on the subject of SaaS taxability.
For the transaction to be taxable, the software must be hosted on a server in Mississippi. The sale would be nontaxable if the software is hosted outside of Mississippi, for example, in the cloud and accessed over the internet.
However, while the legislation clarifies which SaaS transactions are taxable, it does not automatically require a provider to collect and remit sales tax. This obligation depends on whether the provider has established nexus in Mississippi.
How does nexus work in Mississippi?
The term “nexus” refers to a physical or economic presence in a state. If a provider meets one of Mississippi’s nexus thresholds, it must collect and remit sales tax there. There are two types of nexus: physical and economic:
- Physical nexus: A business has physical nexus in Mississippi if it has a physical presence in the state, such as real estate, company representatives, or inventory.
- Economic nexus: Even if a business does not have a physical presence in Mississippi, it may still need to collect sales tax if it meets or exceeds Mississippi’s threshold for economic nexus: $250,000 in sales to customers within the state in the prior 12-month period.
Understanding where your business has nexus is a necessary step in staying compliant. However, even if you have nexus in Mississippi, certain SaaS transactions may qualify for exemptions. Whether or not a transaction is exempt can depend on how the SaaS is delivered or used.
Are there tax exemptions for SaaS in Mississippi?
Certain exemptions and exclusions can apply to SaaS transactions in Mississippi, depending on how the service is used, delivered, or transferred. For example, transfers of SaaS between affiliated entities, such as a parent company and its subsidiary, are treated as nontaxable transactions. Proper documentation is typically required to substantiate the transfer's relationship and nature.
In addition, some nonprofit or academic organizations could qualify for exemptions or reduced tax rates under certain conditions.
Providers should verify whether a specific exemption applies to their business by talking to a tax professional or an official representative of the Mississippi Department of Revenue.
Are digital goods taxable?
Digital goods are typically subject to Mississippi’s standard 7% sales tax rate. As outlined in Senate Bill 2449, this includes goods delivered electronically, such as:
- E-books
- Software downloads
- Music downloads
- Movies
Because digital goods are classified similarly to tangible personal property for tax purposes, they are taxable when sold, rented, or accessed by consumers within the state.
How local tax Rates apply to SaaS in Mississippi
According to the Mississippi Department of Revenue, most local jurisdictions do not charge an additional local sales tax rate in the state. This means that Mississippi’s 7% sales tax rate is used in most cities and counties in the state. However, in Jackson and Tupelo, there are additional taxes of 1% and 0.25%, respectively.
For example, if a customer in Hattiesburg, Mississippi, is charged $3,000 for an annual software subscription hosted on a server in Mississippi, the applicable tax rate is 7%. That would mean the SaaS provider would have to collect $210 in taxes, bringing the total cost to the customer up to $3,210.
While this consistent tax rate may make it easier for SaaS providers doing business in most cities in Mississippi, numerous other aspects of compliance need to be managed. These include determining nexus, proper tax collection, and timely filing of sales tax returns.
How to stay compliant
Staying compliant with Mississippi’s tax rules involves following several clear steps, including:
- Registration: Providers should start by determining whether they have established physical or economic nexus in Mississippi. Those that have nexus will need to register for a Sales and Use Tax account, which can be done through the Taxpayer Access Point (TAP) portal provided by the Mississippi Department of Revenue.
- Calculation: SaaS providers will then have to determine which transactions fall under the 7% sales and use tax rate and whether exemptions apply.
- Collection: Once the appropriate tax rate has been applied, providers will need to collect sales tax during each transaction. For SaaS, this will typically include subscriptions, renewals, and any additional products or services.
- Filing: SaaS providers must file sales tax returns based on the frequency assigned by the Mississippi Department of Revenue. This is based on tax liability and can be monthly, quarterly, or annually. Returns are filed through the TAP portal, usually on the 20th day of the month following the reporting period.
- Remittance: Sales taxes are paid (or “remitted”) along with sales tax returns to the Mississippi Department of Revenue on the 20th of the month. This is also done through the TAP portal.
SaaS companies should also account for other important aspects of compliance, such as utilizing voluntary disclosure agreements (VDAs) to resolve unpaid or uncollected taxes and deregistering if they no longer meet nexus requirements.
Failure to comply can lead to a range of negative outcomes, including interest charges, penalties, and a higher likelihood of being audited. To simplify these processes and maintain compliance, businesses may benefit from using platforms like Numeral or accessing resources offered by the Mississippi state government.
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Compliance resources
The Mississippi Department of Revenue provides several resources that could help providers stay compliant, including the following.
- Mississippi Department of Revenue Official Website
- Mississippi Sales and Use Tax Information Page
- Taxpayer Access Point (TAP) Portal
- State-by-state SaaS sales tax guide
The Department of Revenue can also be reached directly by sending an email to mstaxpolicy@dor.ms.gov or by dialing 662-449-5150.
The bottom line
Although they used to be less clear, Mississippi’s tax regulations for SaaS have recently been clarified by Senate Bill 2449, which suggests that SaaS physically used or delivered within the state may be subject to a 7% sales tax rate. However, exemptions may apply to some sales, such as if the software is hosted in another state.
Digital goods, including e-books, software downloads, music, and movies, are also taxable under these updated rules.
For SaaS providers in Mississippi, compliance involves several steps: determining nexus, registering for a Sales and Use Tax account, accurately calculating tax rates, collecting taxes during transactions, and filing and remitting returns through the Mississippi Department of Revenue’s TAP portal.
Providers will also need to consider other aspects of compliance, such as deregistration if they no longer have nexus within the state. Platforms like Numeral and resources provided by the Mississippi Department of Revenue may be beneficial to simplify the compliance process and reduce the risk of penalties, audits, and other challenges.
