High Technology

Software is always evolving. So are sales tax exemptions.

The taxability of software, cloud services, data processing and digital goods has shifted twice in the last five years across major states (most recently with Wayfair and the cascade of state digital-services rules). Vendors invoice based on whichever rule was current when their billing system was last updated. Buyers accrue use tax based on whichever interpretation their tax flags settled on years ago. The drift between those two and current law is where sales tax exemption opportunity lies.

We work with SaaS and AI companies, software developers, enterprise IT departments, and cloud-native businesses with multi-state customer footprints.

Specific tax issues

• Software taxability shifts. The same product can be taxable in PA, exempt in NY, taxable on some features only in CA. Vendor invoices and self-accrued use tax both drift from current law.
• SaaS vs. on-prem. Many states tax these differently, and the boundary is ambiguous (for example, managed-services wrappers around what is fundamentally SaaS).
• Data processing and digital goods. Newer categories; states have added or expanded these recently, and accruals lag.
• Multi-jurisdiction sourcing. SaaS billed from one state, used by employees in many. Sourcing rules vary and create both exposure and recovery opportunities.

Recovery patterns

Tech companies typically have meaningful recovery on three fronts: vendor invoices that tax SaaS as on-prem software (or vice versa), self-accrued use tax based on outdated taxability assumptions, and infrastructure purchases that qualify for R&D exemptions but were treated as standard capital expense. The combined recovery surface scales with the size of the IT and software spend, not headcount.

TaxMatrix can review your software spend, vet out the suspect vendors and ascertain usage to determine opportunity. Several states, including Pennsylvania, New York and Indiana, have broad sales tax exemptions that lead to material sales and use tax refunds.