New York generally taxes most goods, and software and generally doesn't tax services and digital goods. On top of state tax of 4%, there are local taxes in most counties that can push the total tax rate to 8.875%. Understanding these rates is critical since incorrect collection can lead to penalties and interest charges.

## Nexus in New York

### Physical nexus

Physical presence triggers collection duty immediately. Examples:

- Office, warehouse, inventory, or employees located in New York.
- Independent contractors or affiliates soliciting sales on your behalf.
- Attendance at trade shows or temporary pop-ups within the state.
- “Click-through” affiliates: > $10 000 in referral sales in the last four quarters creates nexus.  
  _Source: [NY Tax Law § 1101(b)(8)(vi)](https://www.nysenate.gov/legislation/laws/TAX/1101)._

### Economic nexus

You must register and collect if, during the four most recent quarters, both conditions are met:

- Gross receipts into NY exceed **\$500 000**, **and**
- You make **more than 100 separate sales** into NY.

Register within 30 days of crossing the threshold; begin collection 20 days later.  
_Source: NY DTF Notice N-19-1._

---

## Registration and Filing

1. **Apply for a Certificate of Authority** through [New York Business Express](https://www.businessexpress.ny.gov). Submit at least 20 days before your first taxable sale.
2. **Display the certificate** in any NY place of business.
3. **Filing frequency** (monthly, quarterly, annually) is assigned by NY DTF and may change with volume.
4. **Returns** are due on the 20th of the month following the period. Zero returns are mandatory when no tax is due.
5. **Penalties** for operating without a certificate range from \$500 on day 1 to \$10 000 maximum.  
   _Source: [Publication 750](https://www.tax.ny.gov/pubs_and_bulls/publications/sales/pub750.htm)._

---

## Taxability of Goods and Services

### Tangible personal property

Default rule: taxable unless specifically exempt. Key exemptions:

- Most unprepared food.
- Clothing or footwear priced **\< \$110** per item (state tax exempt; local tax exempt in most jurisdictions).  
  _Reference: [Publication 718-C](https://www.tax.ny.gov/pdf/publications/sales/pub718c.pdf)._

### Digital goods and software

| Category                                            | NY Taxability   | Notes                                                              |
| --------------------------------------------------- | --------------- | ------------------------------------------------------------------ |
| Prewritten software (downloaded, disk, cloud, SaaS) | **Taxable**     | Treated as tangible property regardless of delivery method.        |
| Custom software written exclusively for one client  | Exempt          | Must be separately stated and reasonable.                          |
| Music, videos, e-books delivered electronically     | **Not taxable** | NY does not classify general digital content as tangible property. |

Sources: NY Tax Bulletin ST-128, Avalara state matrix.

### Services

Services are exempt unless enumerated. Relevant taxable category: **information services** (e.g., database access, credit reporting) unless data is wholly personal or individualized. Implementation, training, and consulting tied to software remain exempt when separately invoiced.

### Shipping and handling

If any item in the shipment is taxable and you charge one delivery fee, the **entire shipping charge is taxable**. Allocate only when practical documentation exists.  
_Source: NY Tax Bulletin ST-838._

---

## SaaS

| Requirement           | Detail                                                                                                                                                  |
| --------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------- |
| **Tax status**        | SaaS is “prewritten software” → taxable.                                                                                                                |
| **Sourcing**          | Destination-based. Use the location where the purchaser uses or directs the software. Billing address is acceptable if user locations are not provided. |
| **Customizations**    | Separately stated custom work is exempt; subscription fee remains taxable.                                                                              |
| **Exempt purchasers** | Accept Form ST-119.1 (exempt org) or ST-120 (resale) to forego tax.                                                                                     |
| **IaaS/PaaS**         | Provision of raw computing power or storage is generally not taxed. Verify each model individually.                                                     |

---

## E-Commerce

### 5.1 Economic nexus recap

Out-of-state sellers surpassing \$500 000 / 100 transactions must collect NY tax on web-store sales. Marketplace sales count toward the threshold even though the marketplace collects and remits.

### 5.2 Marketplace facilitator rule

Marketplaces (Amazon, Etsy, eBay, Walmart, Shopify Marketplace) must collect NY sales tax on facilitated transactions. You remain responsible for:

- Tracking gross NY sales for nexus determination.
- Registering once nexus exists, even if marketplaces remit all tax.
- Filing returns that report marketplace sales as “marketplace-collected”.

Reference: NY DTF TSB-M-19(2.1)S.

### NY sales tax rates

- State rate: **4 %**.
- Local add-ons push combined rates to **7 %–8.875 %** (NYC highest).  
  Use NY DTF address-based lookup or automated tools like Stripe Tax.

### Product specific rules

| Product                                             | Tax status                    |
| --------------------------------------------------- | ----------------------------- |
| Clothing/footwear \< \$110                          | Exempt (state and most local) |
| Dietary supplements                                 | Exempt as food                |
| Physical software (game cartridges, boxed software) | Taxable                       |
| Digital download of software                        | Taxable                       |
| E-book                                              | Not taxable                   |

---

## 8 References

- NY DTF — [Publication 750](https://www.tax.ny.gov/pdf/publications/sales/pub750.pdf) (general guide).
- NY DTF — [TSB-M-19(4)S](https://www.tax.ny.gov/pdf/memos/sales/m19_4s.pdf) (economic nexus memo).
- NY DTF — [ST-128](https://www.tax.ny.gov/pdf/tg_bulletins/sales/b12_128s.pdf) (software tax bulletin).
- NY DTF — [ST-838](https://www.tax.ny.gov/pdf/tg_bulletins/sales/b09_838s.pdf) (shipping charges).
- Stripe — [Stripe Tax Documentation](https://stripe.com/docs/tax).

New York Sales Tax Guide for SaaS and E-Commerce Businesses

## TL;DR

- [Section 174 is reversed](https://abgi-usa.com/section174/latest-and-greatest). All domestic R&D expenses no longer have to be amortized over five-year periods.
- Qualifying startups can immediately get tax refunds for all historically amortized R&D expenses since 2022.
- You should work with your accountant to review your 2022, 2023, and 2024 tax returns.
- If necessary, prepare and file amended returns for 2022, 2023, and 2024 to claim refunds for taxes paid as a result of amortization. Alternatively, you can choose to take a catch-up deduction in your 2025 tax return (or split between 2025 and 2026).
- **Election Deadline:** You must file amended returns within one year of the bill’s enactment.

As part of the [One Big Beautiful Bill Act (OBBBA)](https://www.congress.gov/bill/119th-congress/house-bill/1/text), Section 174 amortization is officially repealed; no more five-year wait for deductions. Additionally, you may be eligible for retroactive relief and immediate tax refunds for all historically amortized R&D expenses since 2022. You will need to amend returns for 2022–2024 to recover amortized costs within one year of the bill's enactment.

## What was Section 174 amortization?

Since 2022, [Section 174 required businesses to amortize U.S. R&D expenses over five years](https://www.thomsonreuters.com/en-us/posts/tax-and-accounting/section-174-expenditures/) (and 15 years for most foreign R&D).

## New section 174A

Updated Section 174A of the Internal Revenue Code allows **immediate full expensing** of **domestic** research and experimental (R&E) expenditures, reversing the 5-year amortization requirement imposed under the 2017 Tax Cuts and Jobs Act (TCJA) for these expenses.

Additionally, eligible small businesses (under $31M in gross receipts per year) with capitalized domestic R&D expenses from 2022–2024 can opt for full deductions for tax years starting after 2021 in your 2025 tax return (or split between 2025 and 2026), OR amend prior year returns to reclaim previously amortized costs.

## Who qualifies for retroactive expensing?

If your business has average annual gross receipts of $31 million or less (using the Section 448(c) test), you can apply the Section 174 repeal retroactively for tax years beginning after December 31, 2021.

## What does this mean for your company?

If your business has average annual gross receipts of $31 million or less (using the Section 448(c) test):

- Review your 2022, 2023, and 2024 tax returns: Identify all domestic R&D expenses that were previously amortized.
- Prepare and file amended returns for 2022, 2023, and 2024 to claim refunds for taxes paid as a result of amortization.
- Alternatively, you can choose to take a catch-up deduction in your 2025 tax return (or split between 2025 and 2026).
- **Election Deadline:** You must make this election within one year of the bill’s enactment.

## Effective date

Any expenditures after December 31, 2024 are eligible to be deducted in full in this tax year.

## How Afternoon can help

[Afternoon.co](http://Afternoon.co) is an accounting platform that takes care of bookkeeping, state compliance, year-end taxes, and sales tax for startups. We serve dozens of YC companies, and would be happy to advise you on Section 174 changes and help submit amended returns.

If you would like to consult about the impact of this change on your company, please schedule a call with us [here](https://afternoon.co/demo).

Section 174 Is Reversed: All US-Based R&D Expenses Are Now Fully Deducted

California is a home to many software and e-commerce companies, but it also has one of the more complex sales‑tax systems in the United States. This guide explains **when you must collect California sales tax (nexus)**, **which products and services are taxable**, and **how to comply** with registration and filing rules without drowning in jargon.

## 1. California Sales‑Tax Fundamentals

**Sales tax vs. use tax.** California imposes two complementary taxes administered by the **[California Department of Tax and Fee Administration (CDTFA)](https://cdtfa.ca.gov/taxes-and-fees/sutprograms.htm)**:

- **Sales tax** applies to retail sales of tangible personal property within California.
- **Use tax** applies to the use, consumption, or storage in California of tangible goods purchased out of state when sales tax was not charged.

From a remote seller’s standpoint, you collect “use tax,” but the rate, reporting, and payment process mirror sales tax, so this guide simply refers to both as _sales tax_.

**Base and local rates.** The statewide base rate is **7.25 %** (6 % state + 1.25 % mandatory local). Voter‑approved **district taxes** can raise the combined rate as high as **10.75 %** in certain cities. Always charge the rate that applies at the customer’s location (see Section 4 on sourcing). The CDTFA maintains the authoritative **[District Tax Rate Lookup](https://www.cdtfa.ca.gov/taxes-and-fees/rates.aspx)** so you can verify the current total rate by address.

> **Key point:** Tax you collect belongs to the state. Track it separately and remit it on time,penalties start at 10 % of the unpaid amount ([Publication 101](https://cdtfa.ca.gov/formspubs/pub101/)).

## 2. Nexus: When Are You Required to Collect?

You must register, collect, and remit California sales tax once you establish **nexus**,a significant connection to the state.

### 2.1 Physical nexus

Triggered by any physical presence, including:

- Office, store, warehouse, or fulfillment center in California.
- Employees, contractors, or sales reps working in the state.
- Inventory stored in a California facility (e.g., Amazon FBA).
- Company‑owned equipment or servers located in California.
- Trade‑show activity exceeding 15 days **or** \$100 000 in sales per year.

### 2.2 Economic nexus

Under **[Assembly Bill 147 (2019)](https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB147)**, a remote seller has nexus if **sales of tangible personal property delivered into California exceed \$500 000** in the current or previous calendar year. Cross the threshold and you must register immediately.

_Small‑seller relief_: If you have **no physical presence** and **< \$500 000** in California sales, you are not required to collect,monitor your sales so you can register promptly once you approach the limit.

For additional guidance, review CDTFA’s **[Wayfair & Remote Seller FAQ](https://www.cdtfa.ca.gov/industry/wayfair.htm)**.

## 3. What Is Taxable?

| Category                                                       | Taxable in CA?          | Notes                                                                                                                                                                |
| -------------------------------------------------------------- | ----------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| Tangible personal property (clothing, electronics, home goods) | **Yes**                 | Default rule; exemptions are limited (e.g., most groceries, prescription drugs).                                                                                     |
| SaaS (pure cloud access, no physical media)                    | **No**                  | Covered by **[Regulation 1502](https://www.cdtfa.ca.gov/lawguides/vol1/sutr/1502.html)**,software accessed via the cloud is a service, not a sale of tangible goods. |
| Digital downloads (e‑books, music, software)                   | **No**                  | Non‑taxable when delivered electronically without a physical copy.                                                                                                   |
| Services (consulting, custom software development)             | **No**                  | Installation labor may be taxable if part of a product sale.                                                                                                         |
| Bundled tangible + digital or SaaS                             | **Yes** (entire bundle) | Shipping any physical item can make the whole transaction taxable.                                                                                                   |

## 4. Rate Sourcing: Hybrid Origin/Destination Rules

California uses **modified‑origin sourcing**:

- **State, county, and city** portions follow the **origin**,your California place of business.
- **District taxes** follow the **destination**,the customer’s delivery address.

**Remote sellers** (economic‑nexus only) apply the **full destination rate**, including all district taxes. Use the CDTFA’s **[rate‑lookup tool](https://www.cdtfa.ca.gov/taxes-and-fees/rates.aspx)** to ensure accuracy.

## 5. Registering for a Seller’s Permit

1. **Apply online** via CDTFA’s **[seller‑permit portal](https://www.cdtfa.ca.gov/services/permits-licenses.htm)**.
2. Provide business details (entity type, EIN, addresses, projected sales).
3. Registration is **free**, though CDTFA may request a security deposit for high‑risk accounts.
4. Post the permit at any California business location.
5. Use your permit number to issue resale certificates on wholesale purchases.

For out‑of‑state sellers, CDTFA’s **[Publication 107](https://cdtfa.ca.gov/formspubs/pub107/)** offers additional registration guidance.

## 6. Collecting, Filing, and Remitting

| Step                | Action                                                                                                                                                                            |
| ------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| Configure platforms | Enable CA tax in your e‑commerce or billing software. For CA‑based sellers, combine origin base rate with destination district rate. Remote sellers charge full destination rate. |
| Filing frequency    | CDTFA assigns **monthly**, **quarterly**, or **annual** cadence based on tax volume.                                                                                              |
| File returns        | Report total and taxable sales, tax collected, and allocate by jurisdiction. File online through your CDTFA account.                                                              |
| Pay tax             | Remit electronically by the due date to avoid 10 % late penalties plus interest (see [Publication 101](https://cdtfa.ca.gov/formspubs/pub101/)).                                  |
| Zero returns        | File even if no CA sales occurred during the period.                                                                                                                              |
| Record‑keeping      | Retain records for **≥ 4 years**.                                                                                                                                                 |

## 7. Marketplace Facilitators

Since **1 October 2019**, large marketplaces (Amazon, eBay, Etsy, etc.) must **collect and remit CA tax on your behalf**. Their sales still count toward your \$500 000 threshold. If you sell both on marketplaces and direct, register once you exceed the threshold and collect on direct sales only. See CDTFA’s **[remote‑seller FAQ](https://www.cdtfa.ca.gov/industry/wayfair.htm)** for details.

## 8. Best Practices for Smooth Compliance

- **Monitor sales** against the \$500 000 threshold.
- **Automate calculations** turn on the tax engine in Stripe, Shipify or any other billing platform for California if you established nexus.
- **Subscribe to CDTFA updates**, local district rates change frequently.
- **Consider signing up for [Afternoon.co](https://afternoon.co?utm_source=blog)** We can put your sales tax on autopilot.

---

## Official Resources

- [CDTFA Sales & Use Tax Overview](https://www.cdtfa.ca.gov/taxes-and-fees/sutprograms.htm)
- [CDTFA Seller’s Permit & Registration](https://www.cdtfa.ca.gov/services/permits-licenses.htm)
- [AB 147 (2019) – Marketplace Facilitator Act](https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB147)
- [CDTFA Wayfair & Remote Seller FAQ](https://www.cdtfa.ca.gov/industry/wayfair)
- [CDTFA District Tax Rate Lookup](https://www.cdtfa.ca.gov/taxes-and-fees/rates.aspx)
- [CDTFA Regulation 1502 – Computers, Programs & Data Processing](https://www.cdtfa.ca.gov/lawguides/vol1/sutr/1502.html)
- [CDTFA Publication 101 – Basic Sales & Use Tax](https://cdtfa.ca.gov/formspubs/pub101/)
- [CDTFA Publication 107 – Out‑of‑State Sellers](https://www.cdtfa.ca.gov/formspubs/pub107)

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