The latest hot-button issue in the Wisconsin sales and use tax world is the taxation of software as a service (SaaS) and the aggressiveness in which the Wisconsin Department of Revenue (WDOR or the Department) is auditing this issue. SaaS is a method of software delivery and licensing in which software is accessed online via a subscription, rather than bought and installed on individual computers. Common examples of SaaS providers in the automobile and truck dealer industry include TSD, vAuto Market View, Dealer Socket, Edmunds.com and VIN Solutions.
The Department does not tax SaaS unless the service provider is also providing a taxable service in the transaction. Most taxpayers in Wisconsin do not pay much attention to the latter half of the previous sentence; taxpayers automatically assume you should not charge or pay sales tax on SaaS. Unfortunately, according to the Department, this is not always the case.
We have recently seen a dramatic increase in the level of scrutiny WDOR auditors are putting into SaaS purchases during sales and use tax audits. Under Wisconsin’s bundling transaction rule, if 10% or more of the SaaS charge contains taxable components, such as a telecommunications component, the entire charge can be rendered taxable. Auditors are putting forth great effort in inspecting SaaS contracts in search of these taxable components. Examples of common taxable telecommunication components include email functionality, messaging capabilities, electronic data interchange (EDI), among others.
The WDOR has also started to focus on software products that help appropriately price vehicles or parts such as vAuto Market View. In Wisconsin, access to a website that provides real-time information is taxable. The WDOR has taken the position that any website providing the most up-to-date information is considered “real time,” even if the information is not updated automatically or immediately.
Baker Tilly and other tax practitioners have voiced concern regarding how the WDOR is unfairly treating the taxation of software in audits of buyers (e.g., car dealerships). The buyers of the software are not familiar with the makeup of these programs and cannot reasonably determine how much of their purchase is attributable to taxable components. This makes it incredibly difficult for buyers to defend taxability in an audit situation. What makes it worse is the Department assesses a punitive 12% interest in audits and almost always imposes a 25% penalty.
Based on the increased audit activity of dealerships and the aggressive approach the Department has taken in auditing software and other technology used by dealers, we recommend reviewing your current software contracts internally and with your state tax advisor. After the initial review, you may need to reach out to your software vendor for more detail. If your SaaS products contain taxable components and you are not paying sales tax, you may have use tax exposure. As a reminder, it is primarily the seller’s obligation to charge and collect sales tax, but if they do not, it is up to the buyer to self-remit use tax on taxable purchases.
We also recommend considering these issues prior to signing a new or updated contract with your software vendors. Look for ways to break apart the taxable and non-taxable components of the charge, which would eliminate the bundling transaction issue and 10% threshold. If you are unsure about the taxability of your purchases, contact Dana Delsman, Ellie Curtis or your Baker Tilly advisor for assistance.
For more information, or to learn how Baker Tilly specialists can help you, contact our team.