TECHNOLOGY & SOFTWARE TAX BENEFITS & BURDENS

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1 TECHNOLOGY & SOFTWARE TAX BENEFITS & BURDENS R&D Tax Credit & State & Local Tax Issues September 20, 2016 Ashley Thompson Director JoAnna Simek, CPA Director 1

2 TO RECEIVE CPE CREDIT Participate in entire webinar Answer polls when they are provided If you are viewing this webinar in a group Complete group attendance form with Title & date of live webinar Your company name Your printed name, signature & address All group attendance sheets must be submitted to training@bkd.com within 24 hours of live webinar Answer polls when they are provided If all eligibility requirements are met, each participant will be ed their CPE certificates within 15 business days of live webinar PRINCIPLE LEARNING OBJECTIVES Research & Development Tax Credit Income Tax Sales Tax 2

3 RESEARCH & DEVELOPMENT TAX CREDIT Who qualifies? What is impact of recent enhancements to R&D tax credit? What is potential value of R&D tax credit? FOUR-PART TEST New or improved business component Product, process, technique, formula, invention or software item Technological in nature Principles of engineering & physical, biological & computer sciences Uncertainty If it can be done, how to do it, what is appropriate design; risk for failure Process of experimentation Evaluative process designed to test new ideas, concepts & prototypes 3

4 INDICATORS OF QUALIFIED RESEARCH R&D departments Scientists Chemists Product engineers Process engineers Product development Process development Software development Technology development Patents PATH ACT ENHANCEMENTS Signed into law on December 18, 2015 R&D tax credit is now permanent Enhancements for 2016 Eligible small businesses can use R&D tax credits to offset AMT Businesses that have $50 million or less in gross receipts Qualified small businesses can offset payroll taxes when no other tax liability exists Certain start-ups that have less than $5 million in gross receipts 4

5 RESEARCH CREDIT CALCULATION Estimated value of federal credit % of QREs State research tax credits % of QREs STATE RESEARCH TAX CREDITS AK HI MD NH TX AR IA ME NJ UT AZ ID MI NM VA CA IL MN OH VT CO IN MT OR WI CT KS NC PA WV DE LA ND RI GA MA NE SC 5

6 You ve Got Sales... Now What? Do you have to file income tax returns in every state where you have sales? Maybe! It depends... Do you have Nexus? Five Considerations for Nexus Types of products & services offered Customer location Volume % sales in each state Other activities in the state Nexus Each state s specific rules 6

7 What are Other Activities? Anything besides sales, such as Any physical location Rented storage or servers (backups) Employees even those working from home Traveling workforce Independent contractors Sales representatives, administrative functions (commonly web developers) Registration with Secretary of State Trade shows attended Using third parties to promote your sales (Amazon Law) Types of Products & Services Can you distinguish your different sales? Goods Digital products Services SaaS, PaaS, IaaS models Application driven Website login Cloud applications Downloaded software 7

8 When is Volume a Factor? Every enterprise has its own risk tolerance Risk tolerance examples Percentage of total sales: 2 5% Flat dollar amounts Historical consistency Why Does Customer Location Matter? What does customer location mean? Ship-to location Bill-to location Mobile device location User location multiple users Service provider location multiple people It matters because it determines volume How good is your data? What data is captured? Know cost of servicing your customers 8

9 Specific State Rules Everything else the state wants to tax Economic Nexus tests, generally $50,000 property $50,000 payroll $500,000 sales OR 25% or more of total Common states AL, CA, CO, CT, OH, OK, TN, WA NY ($1M threshold) Common Misconceptions They can t tax the internet I don t have any profits, so I don t have any risk Isn t there a federal law to protect me? 9

10 Collecting Sales Tax All sales at retail are subject to sales and use tax unless specifically exempt General rule Is software a good or a service? What about a license? Are you selling goods or services? Most states confused about software & cloud products States treat the taxation of services differently What are Top Areas for Tech? Information services Data analytics Computer software or licenses Cloud products Digital products Bundled transactions Virtual currency 10

11 Which State s Tax Do I Have To Collect? Must have Nexus in collection state Must be registered in collection state Situs of sale Goods: ship-to destination state Services: typically, state where service is performed Software: typically, state of user location Digital: varies What If I Do Nothing? Statute of limitations Cumulative tax liability Sales tax collection Becomes burden of the business Implications on sale 11

12 Conclusion R&D tax credit Are you developing new or improved technologies? Understand potential federal & state benefits State income tax What are you selling & where are you selling it? Understand your risk profile State sales tax State rules are always evolving, do you know what you should charge tax on? Don t make your customers tax become your liability 12

13 CONTINUING PROFESSIONAL EDUCATION (CPE) CREDITS BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: The information in BKD webinars is presented by BKD professionals, but applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor before acting on any matters covered in these webinars. CPE CREDIT CPE credit may be awarded upon verification of participant attendance For questions, concerns or comments regarding CPE credit, please the BKD Learning & Development Department at training@bkd.com 13

14 FOR MORE INFORMATION JoAnna Simek Ashley Thompson