Stripe Atlas and sales tax on downloaded software

Discussions
#1

Another taxation question… I have been looking into Strip Atlas to make life simpler selling into the USA. A couple of people have warned me about the difficulties complying with sales tax requirements so I have been doing some research.

Sales tax seems like an impossibly complex subject. How do software companies in the USA deal with this? It seems that some states e.g. Texas consider simply licensing software for use in the state as creating nexus, so it appears that a software business (even if you only exist as a Stripe Atlas corporation in Delaware) needs to register in multiple states for sales tax. Then you need to track any changes i.e. other states that go down the same path as Texas.

Then there is the issue of other activities that might create nexus e.g. exhibiting at a trade show.

Is this just part of doing business in the USA - keeping abreast of nexus rules and changes in every state?

(The rules regarding sales tax actually don’t seem to make a distinction between out of state and other countries, so in theory the same issues seem to exist for a non-US company. However, I guess there are practical difficulties in enforcing tax collection from a company without a connection to the USA. Some people say that is coming via international tax treaties…)

#2

I don’t think that US States have jurisdiction to be able to force tax collection for companies registered in another states IF the company has no physical presence in that state.

Amazon has a distribution center in Dallas, TX, hence a physical location. And, Amazon, closed that distribution center to avoid the taxes. (It offered to reverse that decision later if the back taxes were waived".

From wikipedia:

Texas authorities began an investigation of Amazon’s tax status after a May 2008 report by The Dallas Morning News questioned why Amazon does not collect sales tax from Texas customers despite maintaining a distribution center in Irving near the Dallas/Fort Worth International Airport. Amazon argues that this distribution center, owned by Amazon.com KYDC LLC, located at the same address as Amazon’s corporate headquarters in Seattle, is a legally separate entity and thus does not establish a physical presence in Texas that would require Amazon to collect sales taxes.[54] Amazon has decided to close the Irving distribution center in order to avoid future attempts by Texas to force the collection of sales taxes.[55]

#3

When I was researching found articles like this:

If I understand that correctly it means that if you sell licenses for your own downloadable software in Texas you create nexus, but if you sell someone else’s software you don’t.

It seems like the whole idea of nexus can be redefined at the whim of the authorities, unless you have the resources and inclination to argue with them - which I don’t. So I’m interested to know how US software companies are dealing with these issues, or whether everyone just ignores them - at least until you get big enough for the authorities to take notice.

#4

This is very cutting edge and I don’t know if it’ll “stick”.
Calling bits “physical presence” is redefining “physical”.

The comptroller is not the judge of the lawa here, AFAIK, and it’s in their interest to define a bit as physical.

It’ll be interesting to see if that is upheld.

Bottom line is that this is not yet being applied broadly, hence it’s not yet a problem for companies.

The way to monetize this seems, to me, to have a database lookup service for all the shopping carts. Then sell it as subscription to them for 5% of what it would cost them to develop it in house. (Sell it to more than 40 companies and you should be making 200% per year of what it costs to develop it.

If you’re really keen on this how about starting with JUST TEXAS. You could even offer that free to get customers to get hooked up to your API (although they may prefer a paid subscription service b/c of the high cost to switch and fears that you might disappear (especially if its free right now)

Either way, I’d line up customers before spending much money.
TALK to them.

You’ve already talked to one, me, and I’m not having the problem.
Talk to shopping cart owners (providers)

#5

Thanks for the reply. I agree it seems a very tenuous definition of physical presence. But I try to avoid arguing with taxation authorities.

I had a perhaps naive idea that Stripe Atlas would simplify selling into the US - I would pay the required federal and Delaware taxes, keep a bank account and all would be good.

Then I spoke to someone else who said no way - they had operated a US subsidiary for a while and ended up with a $1m bill for back taxes and penalties. I think they did operate an office though.

I had a 2 hour session with an accountant who specializes in US work, she spent most of the time telling me about the various deadlines and penalties for not filing on time, and explaining how the different states all have different tax laws and rates and separate filing requirements. She suggested I need to research the sales tax laws in every state where I have customers. Since I sell online and don’t necessarily know the customer location until they fill in the form, that means researching every state.

My conclusions after all this were:

  1. I don’t know how people manage to operate a business in the US if they have to be on top of every state’s sales tax nexus laws
  2. Maybe in my ignorance of US laws I have underestimated how much work people put into tax compliance, or
  3. Maybe there is some sort of resource out there that I don’t know about to help people wade through this. I have found a number of services that allow you to calculate and track sales tax, but working out if you have nexus seems to be a different problem. Or,
  4. Maybe this is over-complicating things and the original assumption (don’t charge sales tax out of state) is how businesses normally operate and people don’t generally have problems.

So I figured I should see if I can get some feedback from existing software businesses rather than just talking to accountants.

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#6

Great idea to ask other people with the problem.
Everyone I know does #4

Remember that it’s in the Accountant’s best interest to explain how complicated it is and how much you need them.

How about posting a Poll : do you sell in the USA? If so, How many states do you collect tax for?
That’s also a good way to start the conversation.

One issue with this solution is that the user may not know they have the problem (or care). So you’d first have to educate (convince) them they have even HAVE a problem.

-Clay

#7

I’m glad you brought this up - it’s a question I had a few years ago, and discovered it could get complicated. The conclusion I came to was that if you’re shipping physical goods you have to charge a sales tax if the resident resides in the same state as you. However if it’s just downloadable software, there is no tax in the US - do the rest of you see it the same way?

I had a meeting with an account last year and he never brought this up with me, so that was another indication that I’m doing things okay.

That being said, these are complicated issues, and ones that I don’t want to manage myself. Especially internationally since there’s a VAT tax which does apply to downloaded software. In fact, I only learned about VAT because my payment processor started collecting it on foreign orders and I just noticed while looking over some receipts.

Here’s what my payment processor says: https://support.fastspring.com/hc/en-us/articles/207436686-How-are-VAT-and-sales-tax-handled-

So I bet I could be saving a few $$ by eliminating the middleman and doing payments myself, through stripe - but having someone else figure this out for me is worth the extra transaction cost.

#8

Yes, payment processors like Fastspring make life much simpler. Unfortunately, they don’t seem to do sales to business well - they are optimized for online credit card sales. Maybe I need to re-investigate Bluesnap, who seemed the best set up for business processes last I looked.

I think there definitely is sales tax in some states if you are in the same state, and some are trying to redefine things so that they can tax out of state sales too.

#9

I’m not trying to sell a solution, just manage my own sales processes.

The accountant didn’t seem to be trying to convince me to use her services - more like talk me out of it.

#10

Fastspring do wire transfers & purchase orders. See https://support.fastspring.com/hc/en-us/articles/207438356-Types-of-Payment-FastSpring-Accepts That was one of the things that attracted me to them. I haven’t started using them in anger yet so ask me again in 6 months time. So far they have been helpful and responsive.

#11

A lot of them do claim to process PO’s but I found at least with one (ShareIt / Digital River) they weren’t very good at it.

All customer companies have very different processes for PO / Invoices and some are very badly thought out and ran (strategic incompetence perhaps?)

You need to have your brain in gear to navigate and get paid & sometimes you just need to pick up the phone and speak to someone - very hard to fund if all your looking at is a few %.

#12

Yes, this is the issue with Fastspring.

Many of my customers have inflexible purchasing processes. The purchase order process is something like:

  1. Provide a quote
  2. Customer adds you to their vendor systems There maybe extra forms to fill in, including details of how they are to pay you
  3. Customer creates a purchase order based on the quote
  4. I fulfil the order and send an invoice referencing the purchase order.

The Fastspring process really starts from step 4. They don’t seem to have any process for how to get to that point.

They have suggested that I can provide the quote with the Fastspring details, however I think the quote should include the tax payable, in which case we get back to the original problem, except that I have less idea of the taxes Fastspring are required to pay than I have of my own.

They also suggested that I or the customer could create an order and never pay it and use it as a quote, however I don’t really want to create a whole lot of false invoices. Technically they would real invoices from Fastspring, so I have no idea of the accounting treatment at their end. Creating false orders in my customer’s name seems like a bad idea. Customers would also be reluctant to create an order prior to getting approval i.e. purchase order.

Bluesnap have a better process, in that they do generate a pro-forma invoice which you can use to create the purchase order. Setup in the vendor systems may still be an issue.

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