Do SaaS Companies Ignore Sales Taxes and VAT for the period up to 2022? -

Something I've seen in my job is that it's typical to SaaS and software companies to pay no transaction-related tax (sales taxes, VAT, GST, etc. ).

And I get it.

Taxation of sales tax, VAT, along with GST, are complex and complex and confusing. These aren't things IT leaders would like to spend their time on.

However, it is important to think about the possibility of delaying tax-related transactions could result in the requirement to pay taxes in the near future.

I had a conversation with the Global Tax Director Rachel Harding, my most knowledgeable advisor I've spoken to on the subject.

I asked her:

• 40percent penalties and interest Software companies have paid interest and penalties of 40% and charges of 40% to avoid sales taxes within the State.
• Multi-million dollar valuation adjustments from historical sales tax noncompliance during acquisition due diligence.

Plus, there's more.

In answer to the question we inquired: You shouldn't be ignoring taxes till 2022.

In this blog, we'll examine three key elements SaaS companies should be aware of regarding taxes. This material is from my chat with Rachel who you can play every word of our discussion if you want to hear everything she says.

Three Things SaaS Companies Need to Understand Regarding Sales Taxes

1. Sales taxes are calculated on the location of the buyer and not on the location of the seller.

Sales taxes are quite complicated (especially for those who live inside the U.S.), but generally, the main factor to be aware of is that the tax rate for sales will be calculated according to when the item is used (aka in the area where your customers are). They are not determined based on your location in which you operate or where the company's headquarters.

The most important data to use to source sales data is billing information, along with the machine's IP address. The name suggests it is SaaS is taxed the exact same manner as products, but and not services, which means that it is only the 20 states of 45 U.S. states with sales tax systems that actually tax SaaS. From the year 2018 If you've made enough tax-deductible transactions within the tax zone that surpass the threshold, then you're being considered to have an economic connection (a big shout-out goes to South Dakota v. Wayfair for a great explanation of the concept! ).

A threshold for sales is the amount of sales you're able to achieve within a specific area prior to the time tax filing is required. Each tax jurisdiction (whether it's at a national or state, territorial, or even at the national level) offers its own method to determine the threshold.

2. Tax Regulations and Tax Rules have drastically changed in the last 10 years.

Sales taxes, VAT and other taxation related to transactions have seen an important change over the last ten years. Certain trends are more significant than others , and have altered the tax landscape totally.

Two important changes that occurred in the past are:

• From January 1, 2015 to the 1st day of January, 2015, the EU began requiring software providers to collect collect VAT in accordance with the location of the purchaser and not based on the location of their business or its employees.
• It was in the year 2018 that year that the U.S. Supreme Court ruled that states have the right to charge sales tax on purchases made by sellers that don't reside in the state that taxes them (including those who sell on the web) regardless whether or not they are located in the state which taxes the sale ( South Dakota v. Wayfair, Inc.). (A.k.a. this is the main motive of this blog post) is that now, nonresidents and small companies should be aware of the sales tax as well as how it is implemented.)

In the event that SaaS is tax-deductible has been altered in a range of sectors too.

In the U.S., Florida and California do not have to pay sales tax on SaaS subscriptions. However, New York and Pennsylvania do.

Massachusetts didn't require sales tax collection for SaaS. But in 2020, the state changed its classifications in order to include SaaS charges in the category of "personal tangible property" which means SaaS subscriptions don't incur tax in the state.

Changes like this aren't limited to just all over the U.S.

In our conversation, Rachel offers several examples of how tax rates are shifting for SaaS companies around the globe.

It's not the case that each SaaS chief executive or founder has to be a tax expert in any way.

The point is to know enough about the process so that you can handle this in a proper way and find an IRS firm that you can trust.

3. If you've followed the correct procedure If you've followed the correct procedure, You Don't Have to Pay Anything Extra

"If you're following the correct procedure technically, there's no problem in your favor," Rachel explained.

Taxes on sales are an indirect tax, a tax on the customer, not your corporation. There's nothing you need to spend funds for. But, it's the duty for you to take care of taxes for your client on his behalf, and return the tax to the correct public authority. This is a buyer's responsibility and the seller's obligation.

"It's the moment you do something wrong that it becomes an expense , and even an amount that is charged to the balance on your account. There's a chance, but you're unlikely to apply a sales tax to your customers for two years after the tax is due. After that, it's in the pocket of your customers."

4. Strategies SaaS Companies Can Manage Sales Taxes and VAT

How can SaaS businesses determine all the taxes they must collect and pay around the globe?

Four strategies that we've observed SaaS companies employing to meet the tax obligation related to transactional tax:

1. Do not ignore It

In this post, we've discussed the fact that not paying sales tax is an accepted method, but it may expose your company to many decades of refunds as well as fines and penalties. The time frame in which this strategy can work has been diminishing. Since online retail increases as does the need and capacity to handle it.

2. Self-Help

Doing taxes on your own is an option for big companies with the capacity to do tax work with an internal team.

However, it's not as easy as integrating the tax software that is automated with the sales software.

SaaS companies also need to consider:

• You must ensure that your personal data is protected and accessible.
• Knowing what is taxable as well as the rate to be paid.
• Checking tax thresholds for the time to set the deadline to pay taxes and submit taxes.
• Making sure you invoice the correct amounts and submitting tax returns on time to the tax authorities that you are required to. This could happen monthly, quarterly or even each year.
• Staying informed about modifications in tax laws and taxes.
• Responding to inquiries and notices made by Tax authorities. Is it phishing, or is this a legitimate concern?

It could be a challenge for a finance department without experience in technology. The result could be unrest and a rise in turnover.

3. Employ an accounting firm

If you choose outsourcing your tax burden This means internal resources will be less required and will likely be more expensive. Instead of a custom method hiring an accounting firm usually means they'll take a conservative approach to guarantee compliance to the greatest possible degree regardless of whether or not you'd like to have an individual method.

This perspective is one only an in-house tax expert can provide -- one that is based on understanding the company's strategy and tax law and the ways they're interconnected.

4. Utilize the services of a Merchant of Record (MoR) and outsource your liability

As a company, we are the primary merchant on each transaction you make on your site we are accountable in collecting tax and paying them for you. If you're interested in handling low tax rates, custom taxation, tax-exempt transactions B2C and B2B-everything's provided for you.

The merchant of record is there to assist you should any audits or questions regarding taxation arise. If you need to conduct an audit We will be there to help you -- to ensure that you are not distracted by developing and growing your SaaS firm.

What is the most effective solution for Your Company?

It is possible that the whole thing seems overwhelming, however the worst option is to do nothing.

Like Rachel stated, "I can never promise that you will not be audited. The only thing I say is that I can guarantee you that even small actions now taken will make you an easier candidate for an even brighter future."

To determine what is the best option choice for your business, it's recommended to review the sources that are available and also the alternatives.

"It's all about understanding the particulars of your organization, its footprint, the worldwide tax laws (duh) as well as the risk you're willing to risk."

Nathan Collier Nathan Collier is the Director of Content and Community at .

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