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 So how do these outdated tax codes apply to this new web-based technology that didn’t even exist in the 60s, 70s, 80s, or even the early 90s?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Other states, however, including Idaho, have ruled less decisively, even using outdated tax code applied inconsistently and in a manner that most would consider underhanded.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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