Yes. New York considers SaaS (software as a service) to be tangible personal property, and it is subject to sales tax at a current rate of 4% at the state level. Including local taxes, SaaS is taxed at an average combined rate of 8.53%. This tax applies if your business has nexus in New York (a physical presence in the state or meeting certain sales thresholds there).
This article examines how SaaS is taxed in New York and how to ensure compliance with the law.
What does taxability mean for SaaS?
In basic terms, SaaS differs from software purchased by a consumer and then downloaded on their computer or other device. SaaS remains on the vendor’s hardware. The vendor maintains and updates it, and the customer accesses the software on the vendor’s computer via a subscription.
As the name says, it’s a service. Nothing physical is ever transferred to the customer. How services, including SaaS, are taxed varies from state to state.
Sales tax, like withheld payroll tax, is a fiduciary tax. Fiduciary taxes are never the property of the business collecting them.
SaaS taxation rules in New York
In New York, a distinction is made between prewritten and custom-written software. If the software is prewritten, its access is subject to sales tax. But the difference goes further. In New York, the user’s location determines whether sales tax applies, not the software’s location.
This means that the seller must determine and collect information on its users by state and locality and then apply sales tax to the appropriate users — a significant burden.
Custom-created software is exempt from sales tax.
The transaction is also not taxable if the user accesses computing power only on the vendor’s computer. (This service is known as infrastructure as a service or IaaS.) The distinction is that the software resides on the customer’s computer, and the vendor provides only the processing support.
How to determine nexus in New York
A business has physical nexus in New York if it meets at least one of these criteria:
- Maintains a place of business in New York (office, warehouse, or store, for example).
- Solicits business through employees, independent contractors, agents, or other representatives based in New York.
- Solicits through catalogs or other advertising material and has some additional connection with New York.
- Makes sales in New York and delivers those products in its vehicles at least 12 times a year.
A business has an economic nexus if its taxable sales totaled more than $500,000 for the immediately preceding four quarters and were made to more than 100 customers.
It's pretty complicated, to be sure, and there are some notable exceptions. The transaction is not taxable if a nonprofit organization purchases SaaS for its use and not for resale. The transaction is not subject to tax if the software is used directly and predominately to produce tangible personal property or solely for research and development.
Be careful with these exceptions; if the software is part of a bundled package, the SaaS portion may be taxable along with the rest. Also, be prepared to provide the appropriate documentation to support any claimed exemptions.
Taxing other digital products in New York
Digital goods (such as music, videos, ebooks, ringtones, and artwork) purchased online are generally not subject to sales tax in New York.
Online gaming is generally exempt from sales tax, but features such as multiplayer functionality and monthly subscriptions may move it toward being considered SaaS and, therefore, subject to sales tax in New York.
Example: How local tax rates may apply to SaaS in New York
Let’s look at a specific scenario, taking the considerations discussed above into consideration.
Company ABC is located in Rochester, New York, and offers one SaaS product for a $75 monthly subscription. ABC has 1,212 subscribers in Rochester, 616 in Manhattan, 77 in Buffalo, and 10,000 in other states.
Of the Rochester subscribers, four are nonprofit organizations using the service only for their own operations. Two of the subscribers in Manhattan have documented that the service is used exclusively for research and development. How would ABC calculate its sales tax obligation for the month?
Tax obligation for Rochester customers, to be applied to 1,208 customers (1,212 – 4):
- New York State Sales Tax 4%
- Monroe County Sales Tax 4%
- City of Rochester Sales Tax 0%
- Total 8% (1,208 x $75 x.08) = $7,248
For Manhattan customers, to be applied to 614 customers (616 – 2):
- New York State 4%
- New York County Sales Tax 0%
- New York City Sales Tax 4.875%
- Total 8.875% (614 x $75 x .08875) = $4,086.94
For Buffalo customers, to be applied to 77 customers:
- New York State Sales Tax 4%
- Erie County Sales 4.75%
- City of Buffalo Sales Tax 0%
- Total 8.75% (77 x $75 x .0875) = $505.31
As you can see from this simplified example, sales tax calculations can be complicated and burdensome and are definitely not “one size fits all.” Each county and city has to be considered individually, not only to determine applicable rates but also to assess exceptions and exemptions.
Navigating compliance for SaaS companies
Determining sales tax liability is a complex task, as is correctly calculating the liability once the obligation has been established. However, if the taxes are not calculated correctly and payments are not made in a timely fashion, the taxing authorities in New York can impose interest and severe penalties.
There are penalties, interest, and fines levied on non-compliant businesses. Failure to file your sales tax return promptly can result in a 30% penalty added to the tax due. Selling tangible products (such as SaaS) without a certificate of authority can result in fines of up to $10,000. Failure to keep adequate records or make those records available to the taxing authority upon request can cost $5,000 per quarter of noncompliance. More serious and willful violations can be punishable by incarceration.
So what are the steps to establish and maintain compliance?
The first step is to obtain a certificate of authority. This step establishes a company as a registered collector and remitter of sales tax in New York.
Of course, the next step is to collect the appropriate tax amounts from each customer and keep those funds intact (separate is better) until remittance is made.
Next, maintain adequate records. Your records must reflect total sales, taxable sales, purchases by the business subject to tax on which no tax was paid to the seller, any credits, sales and use taxes by locality, and any other special taxes.
Finally, you must file the correct forms and remit the tax by the appropriate due dates. Most sales tax vendors must file and remit taxes electronically using the Web File system. Upon registration, your company will be designated an annual, quarterly, or part-quarterly (monthly) filer based on the taxable sales volume (historical or expected). The taxes are due in full no later than 20 days after the applicable period ends, and the filing frequency is subject to change based on changes in sales volume.
If your company needs more time or resources to complete all of these steps thoroughly and accurately, consider employing the services of a trusted vendor such as Numeral.
Numeral is an all-inclusive, white-glove sales tax service that offers complete peace of mind in managing sales tax obligations and consumes only five minutes each month of your time — a small fraction of the time necessary to handle everything in-house.
[blog-post-inline-cta]
SaaS compliance resources in New York
New York provides many resources to help educate on sales tax issues. The following are a few to help you search for additional information and greater detail on the topics covered in this article:
- A Guide to Sales Tax in New York State
- Sales Tax Publications and Tax Bulletins
- Quick Reference Guide for Taxable and Exempt Property and Services
- State and Local Sales and Compensating Use Taxes Imposed on Certain Sales of Computer Software
- Recordkeeping Requirements for Sales Tax Vendors
- Sales and Use Tax Penalties
- Information line: 518-457-5181 (Monday to Friday, 8:30 a.m. to 4:30 p.m.)
Also, consider researching webinars, videos, and similar content on platforms like YouTube.
The bottom line
SaaS services in New York are considered tangible personal property and are subject to sales tax with specific exclusions and exceptions.
To determine your sales tax obligation in New York, you must carefully analyze the facts and circumstances of the situation.
Once the obligation is established, the vendor must establish itself as a registered agent by obtaining a “Certificate of Authority.” It must then collect the correct sales tax amount from the applicable vendors, maintain complete records of the transactions, and timely remit the taxes collected.
Do your homework to avoid costly and time-consuming penalties and fines. You can also consider using a sales tax processing vendor such as Numeral to handle the entire administrative burden for you.
