What is a SaaS Sales Tax Permit?

SaaS tax permit usually refers to a state registration that allows or requires a company to collect sales tax and remit it from taxable transactions. States label this document differently; some call it a Sales tax permit, Seller’s permit, Sales tax license, or certificate of Authority.

A software-as-a-service company should, first off, figure out if it has a nexus with a given state. This usually occurs with physical presence in the state through employees or properties, or economic activity that has reached or surpassed a state’s remote-seller threshold. Being subject to state tax does not automatically follow; other factors matter, including how the tax is treated based on the nature of the software offering, whether the business is taxed based on the customer’s location, and whether exemptions or other special rules apply.

Following the 2018 landmark case of the US Supreme Court in South Dakota v. Wayfair, the so-called physical-presence requirement limiting states’ capacity to put on remote sellers a responsibility of sales tax collection was overturned. Consequent to that decision, states can require remote sellers to collect and remit sales tax based on economic activity. Sellers have to comply with the law even if they do not have a physical office or other tangible assets in the state. No single economic-nexus threshold was prescribed as a result of Wayfair. Therefore, different states set their own standards, registration requirements, thresholds, and effective dates.

SaaS taxability is highly dependent on the state where the sale takes place. For instance, state A could treat remote subscription access as tax-exempt, but state B might tax it as a service to be used online. So, the product’s classification as a nontaxable or taxable item often has everything to do with what the software is doing, what the customer gets, whether the exemption is applicable, or what special provisions are being used.

A sales tax permit and a resale certificate serve different purposes.

An EIN (Employer Identification Number) is a number that is allocated by the US Treasury to businesses and other organizations when a business operates as a sole proprietorship or in partnership where the owner uses a Social Security Number as a taxpayer identification number (TIN). A company can use it to meet federal tax filing requirements, run a business payroll, open an account with a bank, and for other similar purposes, but getting an EIN does not grant the privilege of collecting a state sales tax. In addition, a business license is distinct. It usually grants permission to run a business in a specific state or a locality; a sales tax registration is mainly related to the administration of sales and use taxes.

A Merchant of Record (MoR) setup determines which entity handles the reporting and remitting of sales tax for each sale transaction. A Merchant of Record who is the seller in a business contract generally handles the sales tax: calculation, collection, tax preparation/filing, tax remittance, and tax compliance/registration for all the sales included in this arrangement. Nevertheless, who bears these responsibilities mainly depends on how the contract was structured and what the state laws are about taxing and so forth, including those laws that pertain to the Marketplace-Facilitator.

Working with a Merchant of Record does not mean that the SaaS company’s state tax obligations would be altogether lifted. The company might still have a requirement to file for tax, or other related matters, separately, for instance, from its sales directly, other sales channels, its business activities, or a transaction not covered by a Merchant of Record ​‍​‌‍​‍‌arrangement.

Before registering in a state, businesses should review:

• Whether they have physical or economic nexus;
• Whether their specific SaaS product is taxable;
• How the state sources the transaction;
• Whether exemptions apply;
• Whether a marketplace, reseller, or merchant of record is responsible for collection for the relevant transaction;
• When registration and filing obligations begin.