Do SaaS Companies Ignore Sales Taxes and VAT until 2022? -
One of the things I've learned while working at is the widespread tendency for SaaS and software companies to not pay transaction-related taxes (sales taxes tax, VAT, GST etc. ).
And I get it.
Sales taxes, VAT, and GST can be confusing, complicated, and not what software executives want to devote their time.
Also, consider that delaying tax-related transactions has risks well beyond paying some back taxes later in the future.
I had a chat with global tax director Rachel Harding, the most knowledgeable person I've met on this subject.
She shared with me:
- 40% penalty and interest She's witnessed software companies incur 40% in interest and penalties for not complying with state sales tax requirements.
- Multi-million dollar valuation adjustments from historical sales tax noncompliance during acquisition due diligence.
And many more.
In answer to the question we asked ourselves: No it isn't a good idea to ignore tax obligations for 2022.
In this post, we cover three things SaaS companies need to understand concerning taxes. Much of it is taken from my discussion with Rachel, and you can watch the entire audio of our discussion for those who want to listen to the full range of her thoughts.
Three Important Things SaaS Companies Need to Understand About Sales Taxes
1. Sales Taxes Are Calculated Based on the location of Buyer not the Seller
Sales taxes are complicated (especially those in the U.S.), but generally speaking, what's important to remember is that sales taxes are taken into account where the item is being consumed (aka the location where your client is located). It's not dependent on where you are, or the location of your corporate headquarters.
In reality, the most important data to source sales is the billing as well as the computer's IP address. Like the title suggests, SaaS is taxed similarly to services and not goods which means that only 20 out of the 45 U.S. states that have sales tax systems have tax rates that tax SaaS. And since 2018, if you have enough taxable sales in a zone that exceeds the threshold, you will be considered to be in economic connection (a special shoutout to South Dakota v. Wayfair for this concept! ).
A sales threshold is the number of sales you have in a specific jurisdiction before you have to pay taxes. Every tax area (whether it's on a state, territory, or a country-wide at a global level) has unique ways of delineating the threshold.
2. The Tax Laws and Regulations have Significantly changed in the last 10 Years
Taxes on sales, VAT as well as other taxes related to transactions have changed a lot during the last 10 years. Some changes are more important than others, and they have altered the tax landscape completely.
Two historic changes comprise:
- On January 1, 2015, the EU has begun requiring software providers to collect and pay VAT based on the location of the buyer and not on the place of operation for the company's employees or of its headquarters.
- In 2018 it was the year that in 2018, the U.S. Supreme Court ruled that states can impose sales tax on purchases made through sellers located outside the state (including the internet-based sellers) and even when the seller doesn't have an actual presence in the state that taxes it ( South Dakota v. Wayfair, Inc.). (A.k.a. why we wrote this article since now nonresidents and businesses of all sizes must understand sales tax and the way it is applied.)
The question of whether SaaS is considered taxable has changed in a variety of sectors as well.
The U.S., Florida and California do not require the collection of sales taxes on SaaS subscriptions. But New York and Pennsylvania do.
Massachusetts didn't require sales tax collection for SaaS. In 2020, however, the state changed its classification of SaaS fees to "personal tangible property" that means SaaS subscriptions will be tax-exempt within the state.
And these changes aren't just being experienced within the U.S.
In our interview, Rachel offers several examples of how taxes are changing for SaaS companies around the world.
It's not that every SaaS founder or CEO has to be a tax expert -- far from it.
What's important is that you should be educated enough to care about getting it done right, and also finding a tax partner you can count on.
3. If You've Done It Correctly There's no reason to owe anything Additional
"If you do it right technically, then it's zero to you," Rachel explained.
The sales tax is a consumptive tax -- it's a tax on the customer, not on your business. It shouldn't be something you're spending money on. But it is up to you to to collect taxes on the client's behalf and then remit it to the proper public agency. The buyer is responsible, but a seller's obligation.
"It's the moment you're doing it wrong that it's an cost and a liability on your balance sheet. It's possible, but you're not likely to assess sales tax for two years after the tax was due. Then it's from your pocket."
4 Strategies SaaS Companies Can Manage Sales Taxes and VAT
How do SaaS firms determine the taxes they must withhold and remit around the world?
There are four approaches that we have observed SaaS companies take to fulfill the tax obligation related to transactional taxes:
1. Do not ignore It
We've discussed in this article, ignoring sales tax is an extremely frequent practice, but one that can leave your company liable for decades of unpaid taxes, fees, and penalties. The time frame in which this strategy could be effective is waning. While online shopping continues to grow, so will the desire and capability to regulate it.
2. Self-Help
Doing taxes on your own can be a great option in larger businesses that have enough resources to handle efficiently with an internal team.
It's just not as straightforward as plugging the tax software of your choice into your sales software.
SaaS companies also need to be thinking about:
- Ensure that your information are safe and easy to access.
- Learning about what's tax-deductible and what rates to charge.
- Monitor tax thresholds so you know when you'll have to pay taxes and file tax return.
- Remitting the correct amounts and timely filing tax returns to all tax-related jurisdictions in which there is an obligation. This can be every month, each quarter, or annually.
- Be aware of changes in tax laws and regulations.
- Answering inquiries and notices by Tax officials. Is it phishing, or is it actionable?
It can be a burden for a finance department without the technical know-how and can lead to resentment and increased turnover.
3. Employ an accounting firm
When you outsource your taxes it means that there's less internal resources to be utilized, but it's going to be more expensive. And rather than a customized method, using an accounting firm usually means they'll adopt a cautious approach with maximum compliance -- even if you'd like to have a more personalized approach.
The perspective is one that only an in-house tax expert is able to provide which requires a thorough understanding of the company, its strategies, tax legislation, and how they are all interconnected.
4. Make use of the services of a Merchant of Record (MoR) and outsource the Liability
At , we act as the primary merchant on the transactions you make on your site which means we are accountable for collecting taxes and remitting them on your behalf. If you're looking to handle lower tax rates, custom taxes, tax-exempt transactions B2C, or B2B- it all will be handled by.
The merchant of record is there to assist you if any tax audits or inquires are raised. If an audit happens We intervene to take the lead and allow you to remain focused on developing and expanding your SaaS business.
What's the Best Solution to your business?
Perhaps this seems confusing, but the most damaging thing you can do is not to take action.
According to Rachel stated, "I can never promise that you will or won't be audited. The only thing I can promise is that small actions now can make you a better candidate for more brighter and better future."
For determining what's the most effective for your business it is recommended to evaluate the resources available and the alternatives.
"It's essential to know your company's needs, your footprint, global tax laws (duh), and what risk you're willing to accept."
