The Nexus between Chanukah and Compliance: Tax Considerations for Growing Software Companies
Chanukah is looking a bit different this year. Families aren’t congregating together as usual. This means, you may not have your grandparents, parents, aunts/uncles or other family members to help lead you through the traditions.
Do you remember the Chanukah blessings, how to light the menorah (use the shamash!), or which candles to light on which night? Maybe you forgot to buy a dreidel, or you don’t have anyone else to play the dreidel game with. Fear not – because in the age of technology for absolutely everything- there is now a Chanukkah App!
The App was recently updated to a 1.2 version and includes: the chanukah blessings in 6 languages, a video tutorial on how to light the menorah, a 30-minute menorah timer, a virtual menorah to show you which candles to light on which night, and a dreidel game which which generates randomized results so that everyone play dreidel on the go without having to schlep along a dreidel.
The Chanukah App was created by The Saber Team, which is based in New York. Currently, the App has 100,000 users, but the projected goal is to reach at least 200,000 people this Chanukah. As the reach of the Chanukah App expands, so will the complexities of tax compliance for the company.
While the Chanukah App keeps expanding, let’s hope that their compliance team is on top of the growth with a solid compliance strategy. A compliance strategy helps software and SaaS companies prevent wasted time and resources, error-prone tax filings, and slowed growth.
Growth as a software or Saas company creates tax risk because state and local governments see growth as an opportunity to target activities with new rules, and help with budget deficits. Forty-five states have some form of sales tax on software, and there is inconsistency from state to state.
The software or Saas company may need to collect, remit, and file taxes in additional states (besides the state they are incorporated in) based on whether there is a “nexus” with that state. Nexus is a company’s connection to a state or taxing jurisdiction that warrants a taxing obligation. Nexus triggers can include remote employees, customer visits, migrating products/services to the cloud, and remote sales.
Based on a survey conducted by Avalara-MKG, on average, software companies engage in 9 activities that trigger sales tax obligations.
In 2018, the US Supreme Court issued a decision in South Dakota v. Wayfair, that allows states to impose sales tax obligations on out of state sellers based on their level of economic activity in a state. Software downloads, licenses, support, training, and upgrades can all count toward the threshold in a state.
The economic nexus thresholds vary greatly from state to state. California and Texas impose a tax if there are $500,000 in sales (exempt sales included), Kansas imposes a tax on all remote sales, and North Dakota imposes $100,00 in taxable sales.
As the Chanukah App continues to grow, their compliance team should be sure to review the taxability factors, such as type of software, method of delivery/transfer, permanent versus temporary right to use, and the language in their marketing materials, legal documents, and on invoices.
If you are a software or SaaS company that is growing and needs help developing a compliance strategy, the Royal Law Firm’s PLLC’s business and tax planning practice can help you navigate the complexities of software taxability by state. Contact us to learn more.