Refund of Tax Paid on Software Purchases

Kamal Shah, CPA

Managing Director, Indirect Tax

Refund of Tax Paid on Software Purchases by Companies Located Illinois, Massachusetts, New York, Pennsylvania, Washington or Utah

The multiple points of use (“MPU”) exemption is a provision in sales and use tax laws designed to address situations where software is purchased for use in multiple jurisdictions. The MPU exemption allows for allocation of tax based on the proportionate use in each jurisdiction. This results in a refund of sales tax paid on software purchased.

Why do companies overpay sales & use tax on software purchases?

The purchase of specific software licenses or many cloud-based products, such as SaaS, PaaS, and DaaS, products are subject to sales tax in various (but not all jurisdictions) across the country. Typically, sales and use tax laws require tax to be charged based on the location where the software is billed to as this is assumed to be location of ALL OF ITS use. Many companies, especially post COVID-19 have employees that are located in jurisdictions across the country either working out of satellite offices and / or working from their homes. In these situations, companies are overpaying sales & use tax on software purchases because they are paying tax for users that are located in jurisdictions outside of where the software purchases were billed to.

How does the company qualify?

There are no industry and / or purpose of use qualifications to meet in order qualify for this exemption. The only qualification for the MPU exemption is that the software should be capable of being used in multiple locations or by multiple users. While there may be other exemptions applicable to software, the MPU exemption is primarily for companies that are based out Illinois, Massachusetts, New York, Pennsylvania, Washington or Utah.

What is the opportunity?

Once identified there are several ways to recover the overpayments of sales & use tax. The taxpayer can get the refund from the vendor and / or from the state the overpayment was made. In instances where the taxpayer has an open audit, it can be used to offset any audit assessment liability.

How can a taxpayer claim the refund?

Analyze your company’s purchases to identify which vendors are charging sales tax on software or any cloud-based products, such as SaaS, PaaS, and DaaS products. Source Advisors has developed proprietary technology to make this task simple. Our platform allows us to analyze, identify and collect all the documents necessary to file refund claims with minimum resources from our clients.

Regardless of how you chose to pursue the refund claim proper documentation is essential to support the application of the exemption. This will definitely include the purchase invoice, it may also include contracts, usage agreements, and other relevant documentation. Source Advisors has developed relationships with many of the larger technology companies to facilitate the recovery process. Source Advisors is extremely well versed with the sales & use tax refund claim process with these states having submitted, substantiated, and secured hundreds of refund claims.

Related Articles

Contact Source Advisors for a Free Assessment

Embrace the power of tax credit savings with Source Advisors and propel your business towards growth and success. Partner with us today to unlock your company’s full potential.