Software Sales And Taxes?

Discussion in 'Mac Programming' started by Darkroom, Aug 14, 2008.

  1. Darkroom Guest


    Dec 15, 2006
    Montréal, Canada
    does anyone know the official word on taxes for software sales (like iPhone apps)? clearly there's no tax on the price of these apps, but if an app is raking in 2 grand a day, wouldn't revenue agencies want to know about it?

    how do you charge taxes on software if you're a very VERY small business but your clients are random all over the world with no way of knowing they live in the same country/province/state as you?

  2. TEG macrumors 604


    Jan 21, 2002
    Langley, Washington
    Sales taxes are charged just like songs and movies.

    Income taxes may be something else. There may be W-2's and I-9's in the US, but likely those selling are being paid as contractors, so they have to deal with all the taxes themselves.

  3. iSee macrumors 68040


    Oct 25, 2004
    Sales taxes are typically collected at the point of sale and are the responsibility of the retailer. That would be Apple.

    Income tax, obviously, is another story. If you're an individual in the US, you're probably going to be reporting your business income on a 1040 Schedule-C (there's also an "EZ" version of that form which might suffice).
  4. JVene macrumors newbie

    Jul 22, 2008
    I'm no attorney, but here's the matter as I understand it.

    The matter may not be entirely settled, either.

    First off, Sales tax in the U.S. is a matter of state law, not federal law. Each state is different, and some states don't have sales tax (some don't have income tax).

    Sales tax is charged on software sales in a standard 'brick and mortar' based retail store, just like any other taxable retail item.

    In theory, if the retailer is 'mail order' or, as the modern version has it, 'Internet order', and if the retailer is selling to a customer in a different state, then the state where the retailer is based is not able to collect sales tax; the sale is said to have occurred in the state where the buyer resides. If there could ever be a declaration that the retailer's own state is owed that tax on the sale, the problem occurs in the buyer's location where THAT state would also claim taxation, leading to a double tax. Clearly that's not possible if someone is traveling over state lines with recent purchases.

    The purchaser is said to have the burden of paying the sales tax in the state of their residence. In theory, that purchaser is supposed to pay the tax, but in practice it isn't practical for the states to track and enforce this requirement. The vendors aren't required to collect tax FOR states where they have no corporate presence, at least at the present time.

    If the seller and buyer are in the same state, and if that state has a sales tax applicable to the item purchased (some exclude food, for example), then the seller is required to collect that state's sales tax on the sale.

    This leaves the matter in an unsolved limbo. As Internet based sales climb, the notion of sales taxation for the states may have to change, at least in their view, because they are 'being denied' taxes on retail sales, in ever increasing volume. The sticky point, though, is that so far no one has been able to solve the problem raised when the buyer or retailer points to the 'crossing state lines' analogy - as in, what do you expect of the purchaser visited state A, made purchases, then returned home to state B. You can't expect state A to forfeit sales taxes simply because the purchaser resides in another state, and then what is really the difference between such a traveling purchaser and one who requests delivery of goods. What if the purchaser mailed the goods to himself from state A? He would have paid state A's sales tax, if any, because that transaction occurred within the retailer's state.

    If I recall correctly, the supreme court had a case on this a few years ago. I don't think much was settled, except that when such a transaction occurs, it can't be said to have occurred in the seller's state, but in the purchaser's state, because, if I understood correctly, even though retailers collect the tax, this tax is actually levied upon the consumer. Sales tax is something charged to the purchaser. If it were a tax on the retailer, it might as well be levied as a special kind of income tax, and it's not.

    Since the tax is levied on the purchaser, but there is no way to track, prove and collect taxes on what people purchase, at present, states can't enforce the collection.

    This applies to all taxable goods sold over the Internet within the U.S. across state lines, not just software.

    Trust me, though - they WANT to collect this tax. It's a strange state of affairs, though. Theoretically everyone who has purchased anything from an Internet sales source from another state, where they were not charged sales tax, owes the state on those sales - and are in default on those taxes. Proof in pressing a charge, from what I understand, can only come into the states hands in a manner similar to how they would discover illicit sexual practices performed in the home (or hotel) - and although that has happened once, it didn't turn out well for the state (Texas, who's law prohibiting a certain practice was struck down in that landmark case).
  5. Sander macrumors 6502

    Apr 24, 2008
    This is indeed a cloudy issue. I'm in The Netherlands, and it's not entirely clear to our IRS how these things should be handled.

    Somewhat over a decade ago, I had a company selling a paint program for the BeOS. Back then, the IRS inspector scratched his head for a while and decided I didn't have to add sales tax for internet-based sales.

    I recently incorporated again, this time for publishing my computer programming book. It is printed on demand and sold via Amazon (amongst others). I spent a lot of time on the phone with the IRS, and it basically comes down to me not having to handle sales tax at all (it's Amazon's problem). Income tax is a different issue, of course.

    But here's the weird part: I also sell an ebook version of my book (PDF) directly from my site. I am obligated to add sales tax if the buyer is in the EU, so I basically have to handle two separate prices. I have to "take reasonable measures to assure the customer pays the correct price" - officially, I suppose I have to check email addresses of my customers.

    I think this is the closest analogy to selling software online.

    Another infuriating issue is that printed books carry a 6% VAT rate here in The Netherlands, but my ebook is not a book and I have to charge 19% VAT.
  6. gnasher729 macrumors P6


    Nov 25, 2005
    If you are incorporated again, you should be able to collect VAT receipts for everything your company buys, and deduct that VAT from the 19 percent you collect.
  7. Sander macrumors 6502

    Apr 24, 2008
    Of course. It's just hard to explain to the customers.
  8. Darkroom thread starter Guest


    Dec 15, 2006
    Montréal, Canada
    correct me if i'm wrong, but i understand that PayPal has some sort of tax tool for business merchants... so ideally it allows a small business owner to charge tax to someone where applicable. for example, *i think* (i haven't used it) i could use PayPal to charge any Canadian customer GST (as is charged in all provinces) if i set up a checkbox asking Canadians living in Canada to add the government sales tax to their purchase — but couldn't they just not check the box and not pay the tax if they don't want to?
  9. Mac_Max macrumors 6502

    Mar 8, 2004
    I'd imagine that it's run like's resellers and advantage programs: Apple charges tax for locations they have a physical presence. The problem with this (much like with the case of the " tax" in New York) is that sales tax is supposed to be charged for where the product was sold from. For example, lacks a physical presence in Alaska so they don't collect sales tax there. However, if an Amazon reseller is based in Alaska and sells to someone in Alaska, they're supposed to collect the tax and pay Alaska. This probably never happens and Alaska looses out on the income.

    From's perspective, it costs them more money (to pay accountants that know each state's tax law, i.e. what are taxable items, if shipping is taxable in a state, etc) to collect the tax and they get nothing out of it, so why do it at all? Technically, in the case of Amazon, they're not the seller any more than a newspaper is if you put a classified ad in to sell your car. However, it's easier for lawmakers to go after Amazon (or Apple) than it is to go after 10,000 Amazon resellers.

    When politicians talk about a blanket internet sales tax, this is why.
  10. Sander macrumors 6502

    Apr 24, 2008
    You are correct on both points. I use PayPal and have set it up so that sales tax is correctly calculated for EU countries (I had to set this up for all countries by hand, by the way :( ). I don't think this is enforced very strictly by PayPal though. Perhaps it is linked to your physical address you use when setting up your PayPal (customer) account, but I would argue it's not PayPal's responsibility to verify the whereabouts of their users.

    It comes down to me, as a a merchant, to take "reasonable precautions" to assure I'm collecting sales tax appropriately. Of course, one way out would be to simply increase the price for all my customers by 19% and help fill the Dutch treasury :)
  11. Cromulent macrumors 603


    Oct 2, 2006
    The Land of Hope and Glory
    Generally speaking in the UK, if you are running as a sole trader then you don't need to pay or collect VAT. You only need to become registered for VAT when you start earning over a certain threshold (£50,000 a year or there abouts I believe, besr check the website).

    You can still register to be a VAT registered company though, so if you want to be able to claim all the VAT you pay on other products back from HMC & E then you should get yourself sorted for VAT. Remember that Europe does not have a flat rate for VAT, the UK is at 17.5%, Holland is 19% or so, France I think is about 21%.
  12. Darkroom thread starter Guest


    Dec 15, 2006
    Montréal, Canada
    yeah it's the same in canada: don't have to register for a GST/HST and PST number until a certain revenue is earned, but i wanted to be able to claim my new iMac's taxes :p (... and about $4000 of other office stuff).

    i guess i should call Revenu Québec to find out what their position is on this matter.

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