Thursday, January 22, 2009

SaaS and whether to pay online sales tax

FirstRain is a SaaS company, providing our service online, and so our sales tax position is not simple - and the new discussion about states charging sales tax for online sales will impact us.

If you buy products online you are probably already aware that unless you live in the same state as firm you are buying the product from, you don't pay any sales tax. Combined with "free shipping" promotions this can add up to a considerable saving over shopping in the mall. It's a similar process for online software and services.

At FirstRain we've been through the wringer with our tax advisers on where to charge sales tax and where not to - and we've come out where we require our customers to pay sales tax if we are registered in the state. So obviously in New York and California because we have people and offices there, but also in a couple of other states like Massachusetts and Texas for local state tax law reasons.

But such a simple model is going to come under attack. In 2008 8% of all retail is estimated to be online (according to Forrester) and if sales tax was paid on this it would amount to approximately $3B in new tax revenue. There is a move afoot by the states to organize and start to collect sales tax - which makes sense given the projected state budget shortfalls in 2009.

As the Charlston Daily Mail reports: One of the most aggressive states, New York, is being sued by Inc., over a new requirement that online companies must collect taxes on shipments to New York residents, even if the companies are located elsewhere. New York's governor also wants to tax "Taxman" covers and other songs downloaded from Internet services like iTunes.

New York is hurting financially with the financial crisis so we should expect the state to get increasingly aggressive. Good thing we already collect state tax from our New York clients - but I expect the discussion is going to come up with other states in 2009.

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