Whether you're selling digital goods, tangible goods, or services, you won’t need to worry about collecting and remitting sales tax on your sales in the state.
But while SaaS isn't taxable in Delaware, it’s still important for SaaS companies to understand local tax regulations, as well as how SaaS is taxed in other states.
Taxation rules in Delaware
In recent years, laws on the taxation of SaaS have been evolving throughout the U.S. Subscribing to a service that’s delivered over the Internet is a relatively new concept, and states are still grappling with how to classify SaaS and whether it should be subject to sales tax.
This is not an issue in Delaware because the state doesn’t impose sales or use tax on any goods or services, except for certain limited leases of tangible personal property; however, it’s something that SaaS businesses should keep in mind.
SaaS businesses may still pay taxes in Delaware
While there is no sales or use tax charged on SaaS in Delaware, this doesn’t mean SaaS companies don't have to worry about taxes at all.
Delaware does have a gross receipts tax, or a tax on a company's total revenue. However, this tax is levied on sellers of goods and services, not on consumers. It's also charged regardless of the revenue source, and there are no deductions for any expenses.
If you do business in Delaware, including selling SaaS, you must pay the gross receipts tax based on your total amount of business activity in the state. Taxable business activity may include:
- Subscription fees
- Licensing fees
- Fees for consulting
- All revenue derived from services
If you operate in Delaware, you must register through the state’s One Stop Business Registration Portal, and you must then file either a monthly or quarterly gross receipts return via the Delaware Taxpayer Portal.
You'll pay the gross receipts tax at the designated rate, which will be determined based on your business classification.
Most SaaS businesses are classified as one of the following:
- Service and Other Activities Not Elsewhere Classified
- Professional Services
Your classification will determine your gross receipts tax rate, which is typically between 0.0945% and 0.7468%.
Maintaining compliance wherever you do business
The majority of states in the U.S. do charge sales tax, use tax, or both. And, whether your company is headquartered in Delaware or elsewhere, you must understand how these other states’ rules impact your business. You may become obligated to collect and remit sales tax in the jurisdictions where you have customers.
In the past, you had to comply with sales tax rules only in states or jurisdictions where you had a physical presence (such as an office, inventory, or employees). However, in 2018, the Supreme Court made a major rule change in a case called South Dakota v. Wayfair, Inc.
Understanding economic nexus
Since the court’s ruling in this case, states have been allowed to impose sales tax collection requirements on companies with economic nexus, or a sufficient amount of economic activity, in the state. So in some states, even if you have no physical presence there, you may be required to register, collect the correct tax from customers, and remit payments to the local tax authority.
The threshold at which you become obligated to collect sales tax varies by state, as do the rules regarding the taxability of SaaS. While Delaware doesn’t tax the sale of SaaS or digital goods, in nearby Pennsylvania, both are subject to sales tax. The same applies in Connecticut and New York. However, economic nexus thresholds vary between these states.
This means that you need to understand which states tax SaaS. And in those that do, you must track both the volume and the value of sales. Once you’ve reached nexus, you must ensure that you are in full compliance with the state's tax rules in order to avoid potential fines and penalties.
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Final thoughts
In an increasingly global marketplace, even companies headquartered in states without sales tax must ensure that they understand sales tax rules.
Numeral is here to help. Numeral is a sales tax compliance platform that tracks nexus for you, takes care of registration and filing, and monitors changing sales tax laws everywhere you do business, so you can spend as little as five minutes a month thinking about sales tax requirements.
