However, SaaS companies located in or selling to customers in Montana must understand sales tax rules throughout the U.S., as they may be obliged to collect and remit sales tax in other states where they have customers.
Montana compliance
Montana is one of five U.S. states that do not have a statewide sales tax.
There have been attempts to put a sales tax in place in the past, including in 1971, when a proposal for a 2% sales tax was rejected by 70% of Montana residents, and in 1992, when 74% of voters rejected a proposed 4% sales tax.
In 1994, a sales-tax-related ballot initiative did pass, but its purpose was not to impose a sales tax, but instead to limit any potential future sales tax to 4%. Since no sales tax has been put in place, that limitation is currently only theoretical.
In recent years, some states that do impose a sales tax have made changes to their laws regarding the taxability of SaaS and digital goods, as SaaS is becoming a more popular business model, states are becoming more interested in earning revenue from subscriptions. SaaS companies should stay aware of regulations wherever they do business. But as of this writing, there are no active proposals to impose a general sales tax in Montana.
Understanding nexus
Although software businesses won't have to collect and remit sales tax on SaaS sales to Montana residents, they may still have sales tax obligations elsewhere.
In 2018, a case called South Dakota v. Wayfair, Inc. went before the U.S. Supreme Court; in that case, the Court ruled that a state could require a business to collect and remit sales tax on sales within the state if the business had a sufficient economic connection to the state (this connection is known as economic nexus).
Before Wayfair, only businesses that had a physical presence (or physical nexus) in a state could be required to collect sales tax. Today, almost every state that has a sales tax has thresholds for both physical nexus and economic nexus.
If you have an office, a warehouse, or employees in a state, you have likely established physical nexus there. The specifics of when a company establishes nexus vary by state. Most states determine economic nexus based on sales volume and/or the number of separate transactions. For example, your company may establish nexus in a state once it sells $200,000 worth of products or services there, or once it does 200 transactions with the state’s residents.
Transacting outside of Montana
If your company sells to U.S.-based customers outside of Montana, for example, in nearby South Dakota, you need to:
- Determine whether your products are taxed in each state where you have customers.
- Track your sales volume and transaction numbers in the states where your products are taxed.
- Register with states to collect sales tax as soon as you meet their threshold for economic nexus (or physical nexus).
- Begin collecting sales tax from customers in those states, at the correct rate.
- Remit the required sales tax in each state where you collect it, on the schedule set forth by that state.
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Final thoughts
Technology typically moves faster than sales tax laws, and many states have recently adjusted their laws (or are considering doing so) to catch up to new business models such as SaaS. As a result, laws about how SaaS is taxed are in flux.
If you want to make sure your business is always in full compliance, Numeral can help. Numeral monitors changes in regulations that could affect your business, and it tracks nexus for you so you're alerted as soon as you have a sales tax obligation in a new state.
Numeral can also take care of every task and manage every detail related to sales tax compliance, from handling correspondence from local tax authorities to registering your company, making sure the correct amounts are collected, and remitting payments on time.
