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NYS sales tax on downloaded software

Background:

I have a small software business in NYC where people can download and use my product for a period of time before purchasing. They can then make the purchase on my web site via credit card, and a Perl script e-mail's them their unique registration code, which they put into the software to make it fully licensed. Just FYI, there are no physical items shipped to the customer, although this is not pertinent to the issue at hand.

The Issue At Hand:

Originally I thought I would just charge sales tax to NYS customers based on my location, but then I decided to ask my accountant about how to deal with NYS sales tax. He called up NYS Dept. of Taxation and Finance to get it clarified.

According to them, as outlined in their document TSB-M-93 (3) S:

1. Delivery of Internet software sales is deemed to be where the customer's computer is located. Therefore, sales to out-of-state customers are not subject to NYS sales tax.

2. Since delivery is determined by location of the customer's computer, Internet software sales within NY State are subject to tax at the "state and local rate in effect where the customer is located".

No. 1 is pretty straight forward.

No. 2 seems to be a real big problem because, according to the New York State's Form ST-100, there are over 70 tax jurisdictions in NYS with combined rates ranging from 7% (Westchester excluding Mount Vernon, New Rochelle, White Plains, Yonkers) to 8.75% (Nassau County). Then there are all sorts of exclusions and special zones within the 70 tax jurisdictions. None of this is sorted by ZIP code, so it's a real friggin' mess.

So the real question is, how does one charge sales tax on e-commerce purchases to customers within NYS, without ripping one's (remaining) hair out?

Joel, even though you may ship physical software items, I realize that you're in the same situation as me, so I'm hoping you can help out. Your help is much appreciated. Thanks.

A Fellow Software Developer
Saturday, March 06, 2004

You got it right. You have to rip your hair out. That's what we do :)

Somewhere, there's a thing called a "list of communities in New York" which maps community (city/town/village) name to county. Once you know the county you can usually figure out the taxing jurisdiction. We end up maintain a frightful huge table with a list of community names and their jurisdictions. Occassionally the same community name exists in two different counties. Also occasionally people type N. YORK instead of NEW YORK for the city and end up paying 4% state tax instead of 8.625% NYC tax, which we have to make up for ourselves.

There are databases which map zip code to tax rate which you can subscribe to at about $99/year for NY state only, but you still need to know the county in order to fill out your quarterly tax forms.

In conclusion, it is every bit as much of a nightmare as you think, but there's no easy way out. Once we got the initial code done it takes me about one day every quarter to fill out the tax forms, reconcile the accounts, and update any tax rates that have changed.

Joel Spolsky
Fog Creek Software
Saturday, March 06, 2004

Just charge 'em all, say, 10% and sort it out later.

Call it the Universal Service Fee solution.

Kyralessa
Saturday, March 06, 2004

Ugh... I think I'll just ban sales to New York residents and just be done with it. :-)

If people complain, I'll tell them to write a letter to Mr. Pataki.

Thanks for the advice.

A Fellow Software Developer
Saturday, March 06, 2004

Here's an idea:  get someone else to do it.  Selling software is obviously not your core competency so get someone that's good at it to do it for you.

Some guy who agrees it's too much trouble if what you do best is write software that does other things than sell to NY residents
Saturday, March 06, 2004

As an aside, do you charge EC VAT?

Simon Lucy
Saturday, March 06, 2004

We have the same situation in Colorado. It's like The Balkans of Taxation.

We live in a city that crosses two counties with three vastly different sales tax rates (3% where we live in one county, 3.8% in the other county but outside the incorporated city limits, 7.75% in that other county if you're inside the incorporated city limits). Worse, one zip code can be inside all three areas.

As consumers, WE have to be really careful with Internet orders or for-delivery orders to make sure we get charged the right tax. It's nuts.

Brad Wilson (dotnetguy.techieswithcats.com)
Saturday, March 06, 2004

Solution:  Offshoring.  No, not offshore outsourcing. I mean offshore the whole company including yourself.

Do that, and it won't matter which state your customers are in.  It will be solely their responsibility to submit their own sales tax. No more sales tax nightmares for you.  Just make sure you don't go to Europe or Canada where you have to worry about VAT.

Isn't it great how the the US laws make things easier for overseas competitors?

--
Saturday, March 06, 2004

Offshoring!  I like it :-)

So would you propose moving the entire corporation overseas?  Reincorporate in... say... The Caymans? 

Or would you set up a separate company to handle orders and fulfillment?  Does anyone know if this is possible?  Get a PO Box in the Caymans; incorporate a subsidiary company there "FogCreek Software Distributors" that's owned either directly by Joel, or by FogCreek; have the FogCreek site link to the FogCreek Distributor's site when people go to order and then have FogCreek Distributor's pay FogCreek Software for the license?

Can it be that simple?

Ken Klose
Sunday, March 07, 2004

There are plenty of US states that have no sales tax. Moving to one of them is going to be a lot cheaper than relocating overseas.

Dennis Atkins
Sunday, March 07, 2004

Here's a useful table of the state and averaged local tax rates for each state:

http://thestc.com/STrates.stm

Comes in handy when deciding to relocate. Note that the states with no sales tax are scenic ones with lovely woods - Oregon, Vermont, Alaska, New Hampshire.

Note surprisingly which state has the largest sales tax burden of any state in the US -- Tennessee, followed by New York, Louisiana and Oklahoma.

Dennis Atkins
Sunday, March 07, 2004

Oops, Delaware not Vermont. Is Delaware woodsy? I think not, so there goes my scenic theory. Isn't deleware that tiny state? Hm, Joel said recently that Deleware is a good place to incorporate because they don't tax corporations somehow. Hm, dude, you should look into Delaware since its right next to you - set up your server and mail address over there and just telecommute to work from your home office in NY.

Dennis Atkins
Sunday, March 07, 2004

Ah, Montana too has no sales tax.

But check this out:

http://ask.yahoo.com/ask/20011231.html

Alaska and New Hampshire are the two states that have the extremely notable distinction of having both no sales tax and no income tax!

Ideal locations for any internet firm!

Dennis Atkins
Sunday, March 07, 2004

In the United States a company is required to collect sales tax from customers in any state in which they have some form of physical presence  -  a store, office, sales office, devlopment office, even a warehouse.

Legally incorporating Fog Creek somewhere else wouldn't help since we maintain a physical presence in New York City. (Indeed we are incorporated in Delaware, not New York.)

Joel Spolsky
Fog Creek Software
Sunday, March 07, 2004

---" (Indeed we are incorporated in Delaware, not New York.) "----

Everybody seems to be incorporated in Delaware. Now, if some really clever socialist could send around a spoof message claiming that all CEO's of companies incorporated in Delaware had to be physically present in the State on a certain date we could all watch the whole US capitalist class crush each other to death trying to squeeze in:)

Stephen Jones
Tuesday, March 09, 2004

The comment about not moving to Europe because of VAT fails to understand the simplicity of the VAT system in the EU.

To sell to anyone outside the EU, you charge no VAT, the customer has the fun of working out the local taxes with his local authorities. This may be done at the level of the postman or post office insisting that you pay before you get your package.

If you sell to someone in the EU, you add your local VAT just like selling to your next door neighbour and then ship it. The person receiving it doesn't have to pay a bean extra. The single European market is a wonderful thing, at least for trade.

WhatTimeIsItEccles
Wednesday, March 10, 2004

"Isn't Deleware that tiny state?"

No, that's Rhode Island.

Karl Perry
Saturday, March 13, 2004

>If you sell to someone in the EU, you add your local
> VAT just like selling to your next door neighbour and
> then ship it.

not true! iirc
- for transactions between businesses the applicable VAT rate is that of the destination country (to be paid by the recipient, i.e. reverse charge)
- for consumers the applicable VAT rate is that of the destination country as well if the seller's turnover there exceeds EUR 100k/ yr
also note that tax rates vary for different types of goods (e.g. lower rate for books), each different in various countries

diverging tax rates are good, they promote competition between tax jurisdictions and thereby help combat the evil of socialism

fmu

fmu
Tuesday, March 23, 2004

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