Sales/use tax refund opportunities for software purchases and related maintenance agreements [Download PDF
Many companies purchase firm-wide software applications and related maintenance agreements (e.g., Microsoft Windows, SAP, Oracle, Peoplesoft, Lotus Notes, Insight, SHI, Computer Associates, IBM, Cisco, Cognos, Salesforce, etc.). Frequently, they pay sales tax to the software vendor or self-remit use tax on the full value of the software licenses and related maintenance agreements in a single jurisdiction, even when the product is being used in multiple taxing jurisdictions or even in multiple countries.
To the extent a company has paid tax in a single jurisdiction, a sales and use tax refund may be available if the company’s headquarters state allows for the apportionment of information technology transaction costs based on the location of users. Certain states allow for such apportionment of the transaction cost by statute, including: Massachusetts, New York, Connecticut, Pennsylvania, Ohio, North Carolina, Texas and Washington. We are also aware that other states are accepting apportionment of the transaction costs, but have not formally adopted it into statute. Additionally, as many software vendors make the transition from software provider to SaaS provider, sales and use tax refunds may be available in states that do not tax software as a service (SaaS / remote access software) transactions such as: Missouri, Minnesota, Michigan, Tennessee, Wisconsin, Rhode Island and others.
A company that either has software (or software maintenance agreements) delivered to it electronically or accesses the software remotely.
A multistate company that pays sales or use tax on software and maintenance agreements to a single jurisdiction, but is using the software in multiple taxing jurisdictions or even in multiple countries.
A multistate company headquartered in Massachusetts, New York, Connecticut, Pennsylvania, Ohio, North Carolina, Texas or Washington, or other state that allows for the apportionment of the IT transaction cost.
A company headquartered in Missouri, Minnesota, Michigan, Tennessee, Wisconsin, Rhode Island (or other state that does not tax SaaS).
A company that has recently had an enterprise resource planning (ERP) implementation where significant software and related maintenance agreements purchases were made.
This opportunity applies to all industries, but particularly strong targets are multistate retailers, professional service companies, financial services/insurance companies, and hotels.
It should be noted that in some cases, the opportunity may result in some offsetting use tax liabilities in other states, depending on how these states tax digital transactions, though such liabilities likely exist in any case whether or not the opportunity is undertaken. For example, if a company is headquartered in a particular state and the software provider sources the entire sale to that state, but only 50 percent of the company’s employees are located in that state, then the tax to that state has been overpaid by 50 percent. However, the other 50 percent of the employees are located in other states, and there may be potential use tax liabilities in these states if these states subject the transaction to tax. Other states may not subject the transaction to tax because the state does not tax electronically delivered software, the state does not tax SaaS, the software is used overseas, or the state requires that the software be delivered to a computer or server in the state.
How we can help
Grant Thornton’s team will:
Recover sales/use tax overpayments for all periods open under statute;
Assist the company with changes in its reporting to reduce the amount of taxes paid in error on future purchases;
Gather necessary substantiation documents and defend our client’s refund claims in the taxing jurisdiction;
Assist in obtaining refunds or reductions of sales tax that are immediate and enduring above-the-line benefits to the company.
For more information
| Senior Manager, Boston +1 617 848 4999
| Director, McLean +1 703 847 7595