SaaS Sales Tax
Many businesses are shifting to using software as a service (SaaS). States are attempting to determine how to treat SaaS for sales tax purposes. A central question is whether SaaS is a service or more of a transfer of tangible property. While many states deal with software sales, those rules do not typically address software services provided through the Internet. Also, when you have software installed on a server in one state that is accessed remotely through the Internet by users in many other states, to which state do you owe sales tax?
Some states, such as Indiana, have classified certain SaaS as taxable prewritten software when the SAAS offering allows access to software that was previously offered as a download. They are looking at the program provided, not the way it is provided or paid for by a customer.
If you provide SaaS, you need to keep aware of the changes in these laws and what may cause you to be liable for sales tax.
Who’s Responsible for Payroll Taxes?
The U.S. Court of Appeals for the Eighth Circuit has ruled that the owners of a company are “responsible persons” that had willfully failed to remit employment taxes. In this case, the owners did not know that the employment taxes had not been paid because their accountant/bookkeeper embezzled the money.
Generally, the IRS has the ability to collect the “trust fund” portion of the employment taxes due from a person who (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility. In determining “willfulness,” courts focus on the taxpayer’s knowledge of the non-payment of the payroll taxes, or the taxpayer’s showing reckless disregard with respect to whether the payments were being made.
In this case, the company’s owners were informed about the failure to pay the employment taxes the day after the accountant/bookkeeper committed suicide. The owners claimed this was the first time they knew the taxes had not been paid. The owners then sold their companies, paid creditors and employees, but did not pay the IRS.
The owners argued that the limit of their liability was the amount of “unencumbered funds” they had at the time they learned of the unpaid taxes. This argument was based on another case where control of a company changed hands with employment taxes being owed at the time of the change on control. They argued that they did not, in essence, have control of the company because they did not know what the accountant/bookkeeper was doing.
However, the court decided the owners were responsible persons during the time they failed to pay the employment taxes as they owned and had control of the companies. Also, the owners’ decision to pay employees and other creditors on the sale of their businesses after knowing the taxes were due was a willful failure to pay taxes.
IP Rights of Your Employees and Their Spouses
You may require your employees to sign agreements assigning you the right to any intellectual property they create while employed by you. Would you ever think about having your employees’ spouses sign over their rights too?
When you deal with ideas or work that could be patented, the typical rule is that the patent rights belong to the inventor, even if employed by you at the time. This rule is why you have an employee sign agreements transferring these rights to you. In states with community property laws, the spouse of the inventor may have rights to the patentable ideas as well. A court has held that, because the inventions were conceived and patent applications filed during the marriage, the spouse had the potential for an undivided half-interest in the inventions and patents. However, luckily for the company that had acquired the rights from the inventor, the inventor and spouse had declared they had no community assets or liabilities as part of their divorce proceeding. Thus, the spouse had no rights to the patents.
When you are in a business that relies on intellectual property created by its employees, be certain you know who has the rights to that information and that you have everyone with an interest assign their rights to you.
Taxes by the Numbers
The Internal Revenue Service (IRS) releases a report each year on statistics from prior tax years. The IRS just released its report based on 140.5 million individual income tax returns filed for tax year 2009. The changes from 2008 to 2009 are:
• Adjusted Gross Income dropped 6.9%
• Taxable Income dropped 9.3%
• Total Income dropped 15.4%
• Salaries and Wages fell 3.7%
• Net Capital Gain dropped 46.1%
• Ordinary Dividends fell 22.3%
• Charitable contributions dropped 8.2%
However, the number of individuals claiming the homebuyer credit in 2009 was up 15% from 2008 (1.4 million taxpayers claimed the credit).
When the Harassment Doesn’t Stop
A recent Court of Appeals’ decision deals with how an employer can avoid liability for harassment when the harassment doesn’t stop after an employer takes action to stop it. In the case, the employee being harassed called the company’s owner to complain. The next day, the owner went to the job site. The owner told the harassing employees that they would be fired if they harassed the employee again, and the owner apologized to the employee and told the employee to contact him immediately if any further harassment occurred.
Unfortunately, the harassment continued. However, the harassed employee never reported any additional harassment. The Court did not hold the employer liable for the additional harassment because the employer had no reason to know it was continuing.
Content contributed by Wishart, Norris, Henninger & Pittman, P.A., which partners with owners of closely-held businesses to provide comprehensive legal services in all areas of business, tax, estate planning, succession planning, purchases and sales of businesses, real estate, family law, and litigation. For more information, contact Gary Smith at 704-364-0010 or visit www.wnhplaw.com.