Do SaaS Companies Afford to Ignore Taxes on sales and VAT? -

One of the issues I've noticed while working is the widespread tendency to SaaS and software firms to avoid transaction-related taxes (sales taxes tax, VAT, GST etc. ).

And I get it.

Sales tax, VAT and GST can be confusing, complicated and something the top developers of software are eager to invest their attention to.

However, it is important to know that ignoring transactions-related taxes can have consequences that go well above the possibility of having to pay certain tax back later in the near future.

I had a chat I had with Global Tax Director of's Rachel Harding, the most knowledgeable person I know about the topic. Rachel Harding told me:

• 40% penalties and interest the software industry has accrued when they fail to comply with taxes imposed by the state.
• Multi-million dollar valuation adjustments from historical sales tax noncompliance during acquisition due diligence.

Plus many plus.

In answer to our own question: No it's not a great decision to overlook taxes on sales, VAT in addition to GST taxes.

In this post this article, we will discuss five things SaaS businesses need to know concerning taxes. Most of the information is derived from discussions I had with Rachel. Below, you'll be able to watch two of our talks to get more information.

Five Things SaaS Companies Need to Understand Regarding Sales Taxes

1. VAT, GST and Sales Taxes Can Affect SaaS Valuations

When Rachel was on the group of tax experts for mergers and acquisitions of small software companies Rachel was able to observe million-dollar purchase price increases resulting of tax compliance concerns.

"If you're contemplating any kind of ownership transfer, major or even a minor one, they would want to learn more about the company's operations," Rachel explained. "They are going to examine the entire process such as are you aware of the places your products are tax-deductible? Are you following these regulations when collecting, and then remitting? Are you compliant? If not, buyers would like you to address the issue before buying it, or they'll just dock the amount they paid for the purchase."

2. If You're Doing It Right , If You've Do it Right, You Don't Have to Spend Anything More

"If you're doing this correctly technically, the net zero is not a problem for you." Rachel explained.

Sales tax is a consumptive taxan expense for consumers, not your company. You shouldn't have to be paying out of the pocket of your customers. You are responsible to to pay the tax on your client's behalf and pay the tax to the appropriate federal agency. It's the responsibility of the buyer and the seller's duty.

"It's that moment when you've committed an error that you're an expense that's a liability in your balance report. If you do not, you'll probably have the ability to charge sales tax two years after when the tax is due. Thus, the tax has been payed out of the pocket of."

3. Consumption Taxes Calculated based on the Place for the Buyer, not the location of the seller.

Sales tax can be a complex issue (especially those in that of the U.S.), but typically, the most important thing to understand is that sales tax rates are calculated based on where the product is realized (aka the place the customer's location is). The tax isn't calculated according to your geographical location or the area of the headquarters for your business.

The most relevant data used in determining the source of the sales is the invoice number as well as the computer's IP address. As the name suggests, SaaS is taxed in the same manner as other products however, they are not considered services and only 20 out of the 45 U.S. states with sales tax systems tax SaaS. In the year 2018, when you've made enough tax-deductible sales in a zone that exceeds the limit, then you're considered to be in economic relationship (a mention should be made of South Dakota v. Wayfair for this idea! ).

A threshold for sales can be defined as the number of sales within the specific area before tax filing is required. Every tax area (whether it's at a local, territorial state, state, or international or global scale) offers its own method of delineating the threshold.

4. The Tax Laws and Regulations have drastically changed in the last 10 Years

Taxes on sales, VAT and various other taxation that are related to transactions have undergone an enormous change over the last 10 years. Certain adjustments are more crucial in comparison to others, and have altered the landscape entirely.

2015. EU Revenue Collection Obligations from Non-EU Software Companies

On January 1, 2015 The EU is now requiring software providers to take VAT payments and collect it depending on the location of the customer rather than the location of the seller's company or employees.

The rates for VAT are set by the country in which they are implemented. This means that governments have to keep up with changes to these rates at the individual basis.

     2018: U.S. affirms it are able to collect Sales Taxes from non-resident businesses    

In the year 2018, The U.S. Supreme Court ruled that states can impose sales tax on purchases made through sellers located outside the state (including those selling on the internet) as well as when the seller has no physical presence within the state that taxes it ( South Dakota v. Wayfair, Inc.). (A.k.a. This is the primary reason why we write this post, since nonresidents as well as businesses of all sizes must know about sales tax and the method of applying it.)

In the U.S., sales tax laws differ from state to state. Florida and California are not required to collect of sales tax on SaaS subscriptions. But New York and Pennsylvania do.

In the year 2020 Massachusetts has changed the classification of SaaS charges to "personal tangible assets" which means SaaS subscriptions can now be purchased with sales tax inside the state.

In our conversation, Rachel offers other examples of tax law changing in SaaS businesses around the globe:

"We have witnessed, all over the globe, governments introducing laws specifically targeted at companies who do not reside in the nation and offer digital products and services. There are some countries that set a limit for sales while certain states state that every dollar counts as tax-deductible."

5. Global Consumption Taxes Are Getting More Complex

Tax laws are currently underway to be implemented that directly impact SaaS. The near future will see throughout the globe, SaaS companies running digital platforms might be required to disclose the sellers who sell on their platform.

What is the reason tax laws are becoming more complicated?

Nations are aware of the tax losses for online sales, which software companies don't reveal.

As a result, they're looking for new methods to trace the flow of money throughout their state or across the nation, and also to ensure the process of collecting.

The Four Methods SaaS Companies Can Manage Sales VAT and taxes

How then can SaaS businesses determine all the tax they have to withhold and remit around the world?

There are four approaches that we observe SaaS firms employ to fulfill the tax obligation related to transactional taxes.

1. You must not overlook It

In this piece, the delay of taxes on sales is a common practice -- but it could leave your business liable for years of back tax, charges and fines. The period of time during which the strategy is likely to be successful has diminished. Although online retail continues to expand and so do the motivation and ability to control it.

2. Self-Help

Tax preparation done on your own can be a great option for businesses that have the capacity to tackle the tax burden with an internal team.

But it's not as easy to integrate the tax software of your choice into your sales software.

SaaS firms also must take into consideration:

• Ensure that your information is clean and accessible.
• Learning about what's tax-deductible and the tax charges that must be incurred.
• Checking tax thresholds for the date to establish the deadlines for tax payments and file tax returns.
• In fact, you should pay the proper amount as well as filing your tax returns before the deadline in all tax authorities where there is a requirement to. This could be monthly year, quarterly, or annual.
• Keep up-to-date with changes to taxes and tax regulations.
• Responding to inquiries and notices from tax authorities. Do they appear to be phishing or is it actionable?

It can be a burden on a finance department that has no knowledge of technology and may result in discontent and increase high turnover.

3. Find an Accounting Firm to hire

When you decide to transfer your tax burdens to an outside company, it implies that you have less internal resources to be utilized but it's also more costly. In contrast to a custom plan, engaging accounting firms typically implies that they'll follow a more conservative strategy and make sure compliance is met to the highest extent regardless of whether you'd like a strategy that is more tailored.

This is a perspective only an insider tax professional can provide -- one that's built on understanding the company and its tax strategies law, as well as the ways they're connected.

4. Use the assistance of a Merchant of Record (MoR) and outsource responsibility

We, as a business, are the registered merchant for the transactions you make on your site and is responsible for collecting tax and then remitting them on behalf of you. No matter whether you're trying to deal with reduced tax rates, customized taxes as well as tax-exempt transactions such as B2C or B2B , everything is handled by us.

The record-keeping merchant is also at your side should questions or audits on taxation come out. If an audit happens then we take on your responsibility, allowing you to focus on building and expanding your SaaS business.

What is the most effective solution to Your Company?

It's possible that this all seems too overwhelming, but the best option is to do nothing.

As Rachel who wrote, "I can never promise that you'll be audited. But what can I promise you is that I can say is that the smallest action now will improve your chances of being a candidate for more brighter and more secure prospects in the future."

To figure out what's best for your company , it's advised to look at the tools that are available as well as the alternatives.

"It's really knowing the business, your footprint, global tax regulations (duh) as well as the risks you're willing accept."

Check My Full interview with Rachel Harding

Part One: The Motives SaaS Companies Can't Afford to not be liable for sales tax

Part Two: How Does Stricter Tax Laws could mean for SaaS

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

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