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Navigating sales and use tax: 5 considerations technology companies cannot ignore

The underlying financial and taxation frameworks are changing at a staggering pace alongside technology. The growth of new-generation technology companies, the emergence of online marketplaces and platforms, and the proliferation of cloud-based business models have prodded US regulators to tighten the grip on the implications of sales and use tax across states.

Due to the lack of a tangible product, technology businesses—especially those that solely offer services—generally believe they are free from the application of sales and use tax. However, the scope of sales and use tax regulations has expanded over time to embrace a variety of goods and services that technology enterprises deal with.

A company’s profits will only erode faster than it will take to generate those dollars if they are aware of these changes. Therefore, businesses need to be proactive in knowing and adhering to changing sales and use tax regulations. Here are some strategies to enable technology companies better understand their customers:

• Technology enterprises must identify the states in which they have connections to assess their tax liabilities.
• If a state considers a technology company’s services non-taxable based on previous data, the company shouldn’t consider this a pass. Businesses should ideally review the taxability of their products and services at least once a year or diligently watch any new developments relating to state sales/use tax regulations on an ongoing basis.
• Technology companies must make sure that the source and delivery of services comply with each state’s specific usage and sales tax regulations.
• Technology companies must determine how to properly maintain purchase invoices for which no tax has been charged, assess whether such products are taxable, and adequately file tax returns with state tax authorities.
• It is advised that technology companies individually identify the taxable goods and services on the invoice to limit the amount of tax that can be levied. If it isn’t possible, it’s necessary to prove that the taxable goods or services don’t have considerable value, typically less than 10% of the entire invoice value of a bundled transaction, to prevent sales tax consequences on the total cost.