OF TECH AND TAXES – How a SaaS tax could hurt our customers!

I don’t handle it very well when anyone (including the Government) tries to bully our customers. Now… I’m mad.

The tech sector moves fast. When software as a service (SaaS) began to take hold in the cloud-based universe about a decade ago, businesses fell in love. Without the high costs and risks associated with the typical client-server model, SaaS provided businesses with a way to move fast. The potential for mass innovation at a low cost meant happy customers around the world!

Unlike the fast moving tech sector, State tax divisions, have a reputation of moving at tortoise speed. With the introduction of SaaS, the implications in the real world of tax law became wrapped in complexity. Software statues were first drafted in the 1960s, and updates have been slow to the draw. So how do these outdated tax codes apply to this new web-based technology that didn’t even exist in the 60s, 70s, 80s, or even the early 90s? Bottom line: they don’t. SaaS has no transfer of ownership, no tangible delivery, no lease of the software, and typically no relevant regulations that support taxing it. There is simply no reason our customers should have to pay more!

SaaS technology is markedly different from traditional software, especially when it comes to tax code. Instead of a boxed software CD package available at say, an office supply store, SaaS technology lives in the clouds, literally. Instead of a physical, downloadable product with definable ownership, this software is hosted on servers that can span several states, and is only accessible and available through a secure, web-based platform. In the end, no tangible product is transmitted to the user and there is no transfer of ownership. Just code (“1s” and “0s”)—and it’s actually irrelevant what the code or combinations of code actually “do.”

Confused yet? So are tax officials, so are customers, so are technology companies. But many states across the union have begun to make official rulings on the taxability of SaaS technology. The Departments of Revenue in Colorado, Kansas, Iowa, Missouri, California and the majority of other states have determined that cloud-based software paid for by subscription is not subject to sales or use tax for the very reasons outlined above.

Other states, however, including Idaho, have ruled less decisively, even using outdated tax code applied inconsistently and in a manner that most would consider underhanded. To make matters worse, you have tax officials making impetuous decisions with no concept of the far-reaching ramifications of their decisions. For instance, in Idaho there has never been a public statement or ruling on the taxability of SaaS technology until late this year. By what appears to be through backtracking and backhanded audits, they have simply begun to require customers and companies to pay taxes on the service. Even more so, they are trying to demand that punitive back taxes be paid on the SaaS product from the inception of its use (as far back as the law allows).

As the CEO of a small and fast growing tech company, I and many others in my position feel the need to stand up for our customers. We are being forced to make a ridiculous decision. Do we take the State to court and spend an unlimited amount of time and money for an uncertain end and dubious gain? Or do we just roll over, pay the tax and amoral punitive fees, and focus once again on building our companies under new constraints? SaaS start-ups and their in-state customers end up feeling bullied into compliance without a fair hearing. My heart tells me to fight.

The poorly educated stance that tax officials are taking could be the death-knell to the booming tech sectors in those states. Do the these bureaucrats realize how easily a web-based company can move their headquarters 30 miles across a state border? And how valuable these typically high paying jobs are to the overall ecosystem?

As the CEO of TSheets, teetering on this very tightrope, I am interested in what others think.

So, what do you think… Should SaaS be taxable? Why or why not?

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17 Responses to OF TECH AND TAXES – How a SaaS tax could hurt our customers!

  1. Sharing your pain. Taxation abhors a vacuum-as does legislation in general.

    [Reply]

    Matt Rissell Reply:

    @Leo A. Geis,
    That’s a good point, it does… I’m afraid this could not only create a vacuum but actually kill the tech sector in Idaho.

    [Reply]

  2. I fear the day that the same moves are made against companies such as ours. And I’m surprised they came after SaaS before the more tangible products that we ship. In fact, “Service” has never been taxed. And it should not be. I totally agree with your point of view on this Matt.

    [Reply]

    Matt Rissell Reply:

    @Michael Worth, Thanks Michael. There is a massive movement underway to try and address this…. Oh, and I know of a company, like yours, that was indeed forced to start charging sales tax and was penalized as well… Keep your head down. :)

    [Reply]

  3. I agree with you: moving the headquarters, even if only in paperwork is what will happen if state governments don’t catch on. The growth to the economy with no toll on natural resources can’t really be argued with from an economist’s point of view.

    [Reply]

    Matt Rissell Reply:

    @Ky Palmer, Ky, You’re exactly right. Even further, if you look at the multiplier (economist tool for measuring the value a certain job brings to an ecosystem), software is among the highest.

    [Reply]

  4. When I originally left a comment I seem
    to have clicked the -Notify me when new comments are added- checkbox and now
    every time a comment is added I recieve 4 emails with the exact
    same comment. Perhaps there is an easy method you are able to remove me from that service?
    Cheers!

    [Reply]

  5. The bad news is that states give out incorrect information right now on what is taxed. I had an argument with some state staff about taxes and finally their manager came out and agreed with me.

    Taxes are overly complicated and irritating to comply with already.

    [Reply]

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  7. Hi Matt,

    Are there any pending Idaho court cases or tax commission hearings regarding this issue that you could direct me to?

    Best Regards,

    Bill

    [Reply]

    Victoria Reply:

    @Bill Dempsey, Hi Bill,

    Unfortunately we haven’t heard about any upcoming cases or hearings about this issue, but I’ve heard rumor that a bill is to be proposed this legislative session. With that in mind, here is a link to a great ID Legislative blogger:

    http://www.spokesman.com/blogs/boise/

    Or of course you can always check out the ID Legislature website where they post all proposed bills and update their status’. This will include meetings and hearings so you’ll be given a heads up about when there will be a committee discussion and the results:

    http://www.legislature.idaho.gov/legislation/2013/legIndex.htm

    I hope that this helps you out, and thanks for staying tuned! :)

    Warmly,
    Victoria

    [Reply]

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