A Supreme Court Decision SaaS Companies Need to Know

Head’s up, SaaS leaders. Sales tax laws are changing, and smart companies will change with them.

On June 21st, a U.S. Supreme Court decision made waves in the world of retail, rethinking a long-debated question about state sales taxes in light of the rise of digital commerce. This decision has implications for software companies, including SaaS businesses, which may suddenly find themselves with responsibilities for state sales tax collection and remittance that they didn’t previously have to worry about.

What’s this all about?

For decades, it’s been hotly debated whether retailers should be required to collect and remit sales taxes to states they sell into but don’t have any other connection to. A 1991 case called Quill Corp v. North Dakota, heavily influenced by the mail-order catalog industry, stated that only companies with a “physical presence” in a state were required to collect and remit taxes on sales there, a concept otherwise known as nexus.

As ecommerce grew over the decades since then, an increasingly vociferous debate sprang up about whether remote sellers should be required to charge sales tax even in states where they don’t have a physical presence. Brick-and-mortar retailers voiced the unfairness of online sellers being able to sell to their potential customers tax-free. State governments voiced displeasure at missing out on needed tax revenue from the many online purchases that occur in their states.

Some states even went so far as to create statutes or regulations based on an economic nexus standard, saying that companies that hit certain financial thresholds — say, making $100,000 in sales in the state — are considered to have nexus in that state. These rules were challenged in the courts by retailers, and the first such case to make it to the Supreme Court, South Dakota v. Wayfair, Inc., just changed things in a big way.

What does the decision say?

The decision in the Wayfair case says that economic provisions can give sellers sufficient nexus, so that sellers no longer need to have a physical presence in a state to have nexus and thus be on the hook for sales tax collection. Notably, the case did not decide the constitutionality of South Dakota’s economic nexus law — the justices remanded that decision back to the state courts.

How does this apply to SaaS companies?

Each state makes its own laws about what companies are required to collect and remit sales taxes, within the parameters decided by the U.S. Supreme Court. Each state, therefore, has its own rules regarding whether software, or specifically SaaS, it taxable. The Wayfair case doesn’t change those rules, though states may well revisit their rules in light of the new ruling.

The biggest way this decision affects SaaS companies, therefore, is that they may suddenly have nexus in states where they didn’t prior to the Supreme Court decision. For example, say a North Dakota SaaS company makes $200,000 in sales a year to customers in South Dakota, where SaaS is taxable, but has no other connection to the state — no office, employees, or affiliates there. Before June 21st, the company would not have had to worry about collecting sales tax on its sales in South Dakota. But now it will have to collect sales tax on its sales there and remit those taxes to South Dakota, considering that companies that sell at least $100,000 in South Dakota in a year are considered to have nexus in the state.

Figuring out how this decision affects your company will require a lot of info-gathering. The first step is determining, if you haven’t already, which states tax SaaS. Next is to figure out in which of those states, if any, you have nexus under the new rules — this will depend on state laws about economic nexus. You’ll need to register to collect sales tax in any SaaS-taxing state where you have nexus.

Keep an alert eye on the news about state sales tax. State nexus laws are likely to shift rapidly for the next months and years as this decision reverberates.

Katherine Gustafson is a full-time freelance writer specializing in content for mission-driven changemakers such as tech disruptors in fintech, healthcare IT, and B2B SaaS. She also does corporate work on business topics including accounting, management, and innovation for companies such as KPMG, TD Bank, Workday, Avalara, and Adobe. She is the author of a book about innovation in sustainable food, and her writing has appeared in a wide variety of sites and publications including QuickBooks Resource Center, Business Insider, and Forbes. Follower her on Twitter @k_m_g.