Do SaaS Companies Afford to Ignore Sales Taxes and VAT? -
One of the things I've learned while working at is that it's common to SaaS and software companies to disregard transaction-related tax (sales taxes, VAT, GST, etc. ).
And I get it.
Sales taxes, VAT, and GST can be confusing, complicated and not something IT leaders would like to invest their time.
Also, be aware that not paying taxes related to transactions has risks well beyond paying some back taxes at some time in the near future.
During one of my conversations with 's Global Tax Director Rachel Harding, my most experienced and knowledgeable source of am aware of on this subject She told me:
- 40% interest and penalties She's witnessed software companies incur 40% in interest and penalties in the event of ignoring taxes on sales in the state.
- Multi-million dollar valuation adjustments from historical sales tax noncompliance during acquisition due diligence.
Plus there's more.
To answer the question we asked ourselves: no You shouldn't forget about the VAT, sales as well as GST taxes.
In this piece, we cover five things SaaS companies need to understand about taxes. The majority of the information is derived from conversations I had with Rachel. Below, you will be able to listen to two of our chats to hear more.
Five things SaaS Companies Need to Understand about Sales Taxes
1. Sales, VAT, taxes on GST and Sales Taxes may affect SaaS Valuations
When Rachel was on the group of tax specialists for mergers and acquisitions for software firms with small budgets, she saw million-dollar purchase price increases as a consequence of tax evasion.
"If you're planning to make any type of ownership change, whether it's a majority or minority investment, people are going to investigate your company," Rachel explained. "They will investigate all the processes such as are you aware about where your product is taxable? Are you watching these rules when collecting and remitting? Are you compliant? If not, they'll be required to rectify the issue before buying it, or they'll just dock the purchase price."
2. If You've done it right, You Shouldn't Owe Anything More
"If you've done it the right way, technically, it's net-zero for you," Rachel explained.
Tax on sales is a consumption tax that is a burden on the consumer, not your business. This shouldn't be a tax you're having to pay out of pocket. But it is up to you to collect sales tax on your client's behalf and remit it to the right department of government. It's a buyer's liability and a seller's responsibility.
"It's the moment you've done the wrong thing that it's an expense and liabilities in your balance sheet. In the event that you don't, you're unlikely to assess sales tax two years after it's due. So then it's all from your pocket."
3. Consumption Taxes Are Calculated Based on the Location for the Purchaser, Not the Seller.
Taxes on sales are a bit complicated (especially those in the U.S.), but in general, the thing to remember is that sales tax is collected where the benefit of the item is realized (aka the place where your customer is located). The tax isn't calculated based on your location as well as the area of the headquarters for your business.
The most meaningful data for sourcing sales is the invoice number as well as the computer's IP address. The name suggests that SaaS is taxed in the same way as services and not goods which means that only 20 out of the 45 U.S. states with sales tax laws have tax rates that tax SaaS. In 2018, if you have the amount of taxable sales in your area that is greater than the threshold, you will be considered to be in economic nexus (a huge shout-out for South Dakota v. Wayfair for this concept! ).
A sales threshold refers to the amount of sales within a certain region before you are required to file taxes. Every tax area (whether it's a territory, territorial, state or a country-wide or a national level) offers its own method of setting the threshold.
4. Tax Laws and Rules have Changed Dramatically in the Last 10 Ten
Sales taxes, VAT and other transaction-related taxes have changed a lot over the last ten years. Certain adjustments are more crucial than others, and they have altered the tax landscape completely.
2015: EU Tax Collection Requirements For Software Firms that aren't EU members.
Since January 1st, 2015 on the 1st of January, 2015, the EU has begun requiring software providers to collect VAT and to remit it according to the location of the purchaser rather than the place of operation for the company's employees or of its headquarters.
Rates for VAT are decided by the country, meaning governments are accountable for keeping up with the changes in these rates at an individual level.
2018: U.S. Votes That States Can Collect Sales Taxes from non-resident businesses.
In 2018 it was the year that in 2018, the U.S. Supreme Court ruled that states are allowed to charge sales tax on purchases made from out-of-state sellers (including online sellers) regardless of whether the seller does not have a physical presence in the state that taxes it ( South Dakota v. Wayfair, Inc.). (A.k.a. this is the main reason why we write this post is because now, nonresidents and small businesses need to know about the sales tax system and how it applies.)
The U.S., sales tax laws vary from state to state. Florida and California are not required to collect of sales taxes on SaaS subscriptions. However, New York and Pennsylvania do.
Just in the year 2020 Massachusetts has reclassified SaaS charges to "personal tangible property," that means SaaS subscriptions are now sold with sales tax in the state.
In our interviews, Rachel offers other examples of how tax laws are evolving for SaaS enterprises around the world:
"We have seen, across the world, nations making rules specifically targeting foreign-owned businesses that offer digital products and services. Certain countries will set a minimum amount of sales. Some of them say every dollar is taxable."
5. Global Consumption Taxes Keep Getting more complicated
Tax laws are currently in the process of being enacted that directly affect SaaS. Very soon, in all over the world, SaaS companies running digital platforms could be required to report every seller that uses their platform.
What is the reason tax laws are becoming more complex?
Nations are aware of the loss of tax revenue on digital sales that software companies aren't disclosing.
As a result, they're finding new ways to track the flow of cash within their state or country and enforce collections.
The Four Ways SaaS Companies Can Manage Sales Taxes and VAT
Then how can SaaS firms determine the taxes they need to pay and withhold across the globe?
There are four approaches that we have observed SaaS businesses employ to meet the tax obligation related to transactional taxes:
1. Don't Pay Attention
We've discussed in this article, ignoring taxes on sales is a popular practice -- but it could leave your company with decades of unpaid taxes, fees, and penalties. The time frame in which this strategy could be effective is waning. The pace at which online transactions continue to increase, so too will the desire and capability to control it.
2. They'll do it themselves
Doing taxes on your own can be a great option in larger businesses that have the resources to manage the tax burden with an internal team.
However, it's not as simple as integrating the tax software of your choice into your sales platform.
SaaS firms also must think about:
- Ensure that your information is clean and accessible.
- Knowing what is taxable as well as the charges to be charged.
- Monitoring tax thresholds to know where you'll need to remit taxes as well as file tax return.
- Remitting the correct amounts and filing tax returns in time to all tax-related jurisdictions in which you have an obligation. This can be monthly annual, quarterly or even annually.
- Staying informed about changing tax laws and regulations.
- Responding to notices and inquiries from the tax officials. Is it phishing or are they a legal matter?
This could be difficult for finance departments that do not have technical expertise and cause resentment and increased turnover.
3. Employ an accounting firm
If you contract out your tax preparation, there are less internal resources required however it will cost more. Instead of a custom strategy, hiring an accounting company typically means that they'll follow a more conservative strategy that is compliant to the highest degree -- even if you'd prefer to have a more personalized approach.
It's an insight that only an inside tax professional can provide -- one that requires understanding the business strategy, the tax legislation, and how they are all interconnected.
4. Make use of a Merchant of Record (MoR) and outsource the Liability
At , we act as the official merchant for all transactions on your site and are responsible for collecting taxes and remitting them on your behalf. Whether you're trying to manage reduced tax rates, customized taxes, tax-exempt transactions B2C or B2B -- all of it is taken care of for you.
Merchants of record are there to assist you if there are tax audits or questions that arise. If an audit happens We intervene to assume the responsibility -- so you can concentrate on building and growing your SaaS company.
What's the best solution for Your Company?
It's possible that this all seems too over the top, but the best thing you can do is not to take action.
According to Rachel stated, "I can never promise that you will or won't receive an audit. What do I can assure you is that the smallest actions now can help you prepare for a far brighter prospects in the future."
For determining what's the most effective for your business it is recommended to evaluate your resources and your alternatives.
"It's really knowing the business, your footprint, global tax law (duh) and the risk you're willing to take on."
Stream My Full Interviews With Rachel Harding
Part One: The Reasons SaaS Companies Can't Afford to not pay sales tax
Part 2: How Stricter Tax Laws Mean for SaaS
