Software as a Service Taxability - SaaS - Service or Software

Saturday, April 17, 2010

Software as a service is not a new concept. Provided below is a simple (though lengthy) definition of ASP or SaaS:

DEFINITION (from TTR's Subscriber Website): Application Service Provider Software ("ASP" Software), also known as Software as a Service ("SaaS" - Pronounced Sass) is a transaction where a purchaser pays to use software over the internet under a limited license of use. What differentiates ASP software from traditional software sales or licenses is that the purchaser does not typically download or install any software on their computer or machine. Therefore there is no "real" transfer of tangible personal property or "download" of software. Instead, the software is merely "accessed" and "used" over the internet by the purchaser. Under this type of arrangement, the ASP software provider hosts the software on its equipment, often located outside the state of the purchaser or user and permits the purchaser to use the software under a limited license of use. ASP software transactions can take many forms, including, but not limited to access to software on a per use payment basis, hourly payment basis, or some other fixed/variable time usage basis.

TAXATION: A handful of states have specific rules that address how to tax SaaS.

Often though, taxing SaaS involves a review of applicable tax laws, facts and circumstances, and in some instances comes down to a business decision. Provided below are a few questions to assist with a tax decision:

Where are the servers located that house the SaaS programs?
Where are customers located?
Does the state specifically address SaaS?
How are services taxed?
What services are taxed?
How is software taxed?
How is electronically delivered software taxed?
How are information services taxed?
Where is the server located?
Where is the customer located?
What does the contract permit a customer to access?
What is the true object of the transaction (in states that use "true object" tests)?

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