Software as a Service: What Sellers Need to Know About Sales Tax | Podcast

Private Equity in Motion

In this episode of Weaver: Beyond the Numbers, Private Equity in Motion, Sean Muller and John Westbrook break down how states define and tax software as a service (SaaS) and why it has become a critical issue in state sales tax due diligence. They explain the different state approaches to SaaS, how digital goods and software‑enabled services are treated and the risks sellers may face when proprietary tools resemble taxable software. Readers will gain a clear understanding of what triggers SaaS taxability and why these distinctions matter during a transaction.

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Detailed Description of Software as a Service: What Sellers Need to Know About Sales Tax

00:00:00
Sean: This is Sean Muller, and John Westbrook is joining me again as we talk about sales tax issues and due diligence and what we’re seeing for it to help sellers out.

Big piece: software as a service, right? SaaS is the short term for it. So, states are very aggressive on SaaS.

What is SaaS, and what should we have heard about it?

00:00:18
John: SaaS became a hot button issue earlier in the late 2000s when that became the predominant mode of delivering your software to your customers.

And so the way that came about was a bit of a mixed approach in the states.

00:00:42
John: Some states already taxed software, and so they just changed their definition of software to be delivered in any format — whether you download it electronically, access via web server, which then loops in SaaS.

00:00:59
John: Other states said, “We’re going to make it a taxable service.” And so, you know, the taxable services are specifically enumerated, and SaaS became one of those.

Other states just said, “We think that SaaS is close enough to a service we already taxed. And so we’re just going to call SaaS data processing,” like in Texas.

00:01:20
John: It’s a state-specific rule as to what types of software qualify and the extent to which — really, the question becomes — the extent to which the user can control or manipulate the underlying data, as opposed to maybe just dashboarding and viewing it.

That’s less likely to be SaaS in any given state.

00:01:43
John: But if a user is able to access through a web application underlying data and manipulate the data and result in different outcomes, that’s likely to be considered SaaS at a high level.

00:01:56
Sean: So, what happens if this studio uploads this video and sends it to us? Does that cause issues for them, potentially?

00:02:04
John: Well, I don’t want to give tax advice without seeing the contracts. But typically, that would be classified under a digital goods rules.

00:02:15
Sean: Okay.

00:02:15
John: There is a distinction between software as a service, which is the ability to log on and use software, versus logging on to access digital videos and those types of things.

00:02:27
John: So maybe if the studio layered on our ability to go back in and edit the software or take out portions, that might be considered blurring the line between, well, are they accessing a digital studio or a set of recordings?

Or are we allowing the user some layer of control over that?

00:02:48
Sean: And what we’re seeing a lot of it here recently is a seller has some proprietary software they’re using to analyze a client’s data and they’re saying, “Well, I’m just providing a service. That’s not taxable.” Right?

Well, are we seeing issues there?

00:03:02
John: Certainly, because a lot of times we get in that situation and they say, “Well, we’re just doing the same thing through a web portal that we would be doing maybe in traditional deliverables in print.”

And sometimes that’s a great user case, and there’s no additional charge to access your content via the web portal and it’s a great convenience to users. But it does create the question of does that rise to and create an issue that now we’ve kind of digitized that and created software that they can use.

00:03:40
John: And to what extent, again, can the end user manipulate any of the underlying data or get a different result versus just accessing the report?

00:03:49
Sean: Okay. Well, John, it’s been very helpful. Thank you very much.

00:03:52
John: Thank you.

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