Managing Sales Tax for Software Companies

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This article was contributed by our partner, Avalara, as part of its campaign to help more software businesses track sales and excise tax, be audit ready, and know when and where they should file to make sure they are compliant with any new tax obligations.


The software industry is dynamic, with new developments and trends happening all the time. Tax legislation is constantly evolving to keep pace with the industry, and trying to stay compliant can get complicated. As it stands, the 45 states with a sales tax, plus Washington, D.C., categorize software up to 10 different ways for tax purposes. That can be a lot to manage if your company is doing it alone.

Knowing your nexus

The first step to staying compliant — no matter the industry — is knowing where you have tax obligations. But software comes with its own unique challenges. Here are just a few of the reasons software taxability can be complex:

  • It can be difficult to determine if software products are taxable or exempt based on physical vs. digital delivery
  • SaaS products aren’t always taxable, but when they are, those rates can differ based on where the service is provided (vendor, customer, or server location)
  • It’s not always clear if sales tax is applicable to software licenses, upgrades, and subscriptions
  • Software companies often have remote employees, field sales staff, or contractors located all over; employees in other states or tax jurisdictions can create nexus
  • Software companies are known for rapid growth; new locations, products, or expanding web sales often mean new tax obligations

All of these challenges can add up to a complicated tax compliance landscape and a foggy idea of where you need to register to collect and remit sales tax. Together with our partner Avalara, we can help you get started; check out the Know Your Nexus ebook to learn about types of nexus or take the Avalara Free Sales Tax Risk Assessment to determine where you have economic nexus.

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Maintaining efficiency

Once you’ve determined where you need to register, you need an efficient way to keep track of taxability for all your products and services. If you’re doing it manually, you could be losing time and money (and gaining a few headaches). It’s time to automate.

Avalara offers Avalara AvaTax, which is an innovative, cloud-based sales tax calculation product. It determines and calculates the latest rates based on location, item, legislative changes, regulations, and more. Plus set up is virtually seamless: Avalara supports connectivity to custom applications with a well-documented and robust developer toolkit (API), built for developers by developers, to enable faster time to market. It works with most financial systems so you won’t have to worry about disruptions in business processes or hits to productivity.

Accommodating growth

Facebook founder Mark Zuckerberg summarized how to be successful in the software industry succinctly with his motto “move fast and break things.” It’s no secret that software companies grow quickly. From hiring staff to launching new products to adding partners and more, part of what makes software companies so dynamic also makes them open to errors in tax compliance (and the costly fines that come with them).

With more than 1,200 signed partner integrations, Avalara works with the most common ERP, POS, ecommerce, billing, and CRM systems. And, Avalara software is built to grow with you, automatically updating sales tax data in existing business applications as a company expands into new markets, offers new products, or leverages new sales channels — including international channels.

Increasing customer satisfaction

Buyers expect a seamless checkout and billing experience, whether they’re paying for a recurring subscription or a one-time purchase. To achieve this expectation, companies need tax software that can automatically update tax rates at the point of sale with the most up-to-date tax information. Even during the busiest online shopping holidays, Avalara solutions are built to keep up.

Finding a solution

Together, we can help you keep up with the ever-changing software tax landscape using tax automation tools like Avalara AvaTax, Avalara Returns, Avalara Consumer Use, and more.

Explore options here or contact your account executive for more information.

To stay up to date on all things software tax, keep an eye on Avalara Tax Desk.

Tags: SaaS Accounting Compliance

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