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There’s an app or pro for that! Complicated tax issues specific to IT firms

Professionals looking at computer screens, taking notes.

You probably didn’t launch your company because you want to become a tax expert. You want to focus on the purpose of your business, but you can’t ignore your tax liabilities, either. Some U.S. tax laws, like sales and use taxes, are written by local governments. This dispersed authority provides them with direct revenue streams, but also can create a confusing patchwork of rules and rates for taxpayers to follow. The recordkeeping and responsibilities are also convoluted because businesses usually collect and remit these taxes on behalf of their customers.

 

While the application of sales and use taxes is clear for physical products sold at brick-and-mortar stores or shipped from warehouses, the rules are murkier about products and services sold by information technology (IT) firms. Luckily, these business owners are more likely to deploy financial management software, applications, databases, and other secure, electronic systems than owners in other industries. Whether you handle these complex financial tasks in-house or hire industry leaders like BATS XPress for business management services, your accounting system needs to consider some of the unique tax situations for the IT field. These examples illustrate how conflicting, irrational, and inconsistent the tax laws are but they shouldn’t be treated as guidance for your specific tax situation. We always recommend talking with a professional.

 

1. Tangible vs. Digital Goods: This distinction of whether you can touch an item may be the main source of inconsistencies in the taxability of IT products. Some states treat downloaded products as taxable but digital products that you can access online as not taxable. For example, a movie or music may be taxed if sold in a physical format, like a DVD or record, but not taxed if a digital copy of the same content is sold and accessed online, such as renting the movie on Amazon or listening to the album on Spotify. Taxjar notes that “many state laws are way behind when it comes to current technology. [They] haven’t explicitly written laws or regulations covering the taxability of digital goods… Digital products in Idaho are taxable when the purchaser has the permanent right to use the product. When the purchaser is leasing or renting the item, it is tax exempt. If the right to use digital music, digital books, digital videos or digital games is conditioned upon continued payment from the purchaser, it is not a permanent right of use,” such as with subscription media streaming services.

2. Products vs. Services: Sales or use taxes may not apply to everything sold. Typically, prewritten software and hardware, like laptops and storage servers, are taxable, but customized software and project management services may not be.

3. Packages vs. Itemized Charges: Above we said that products and services are taxed differently, however, according to the Washington State Department of Revenue, “generally, when IT products and services are sold as a non-itemized package, the entire transaction is subject to retail sales or use tax.” That means how you write your invoice determines your tax liability because the same service may be taxable if grouped with everything provided or not taxable if listed with individual prices.

4. Tax Rates: Once you’ve determined that taxes apply, you also must make sure to use the correct rate. Avalara, a leader in tax automation services (no affiliation), explains that “while most states are origin-based (sales tax is charged based on the origin of transaction), some are destination-based (sales tax is charged based on where an item is shipped) – and a few states use a combination of rules.”

5. Who to Pay: Because sales and use taxes are written by local governments, you may be responsible for filing and paying taxes to many different agencies. For example, in addition to the Idaho state sales tax, the Idaho State Tax Commission lists 19 communities that may have a local sales tax and other areas with an Auditorium District Tax.

6. When to Pay: Unlike individual income tax returns that are all due on April 15, sales and use tax filing laws may be due on the last day of the month with filing frequencies based on sales volumes. For example, the Utah State Tax Commission requires filing once a year for annual tax liabilities of /below $1,000 and monthly filing for annual tax liabilities above $50,000.

7. When NOT to Pay: Sometimes, governments pause sales taxes, called a “tax holiday,” so consumers can purchase goods and services tax-free. “Back to School” is a common subject for tax holidays, exempting taxes on clothing bought on a specific date and below a dollar amount. The communication and application of these taxes can be inconsistent, but that doesn’t remove your responsibility to accurately collect it. If you over-collect, you will have to spend resources to refund these taxes to your customers.

8. Tax-exempt transactions: Some businesses and individuals may not be required to pay sales tax. As the business owner, you’re responsible to keep records with valid tax exemption certificates for every sale that you didn’t charge taxes in case you’re audited.

 

If these complex and perplexing tax scenarios specific to the IT industry make you realize that you don’t have the time to handle it all, let’s talk about our seasoned team taking care of your financial records, including tracking and classifying expenses so you can take advantage of all tax deductions that you qualify for, too. Our clear records and efficient tax support mean you can get out of the books and back to your business. Let us take care of your finances, so you can take care of your customers’ computer systems!