Do SaaS Companies Ignore Sales Taxes and VAT until 2022? -
One of the things I've discovered while working is the widespread tendency for SaaS and software companies to disregard transaction-related tax (sales taxes, VAT, GST, etc. ).
And I get it.
Taxes on sales, VAT and GST are complex, confusing and are not the things IT leaders would like to invest their time.
Also, consider that delaying tax-related transactions could result in the need to pay certain back taxes later in the near future.
I sat down with 's Global Tax Director Rachel Harding, the most knowledgeable person that I have met on this subject.
She shared with me:
- 40% penalties and interest She's witnessed software companies incur 40% in interest and penalties in the event of ignoring state sales tax requirements.
- Multi-million dollar valuation adjustments from historical sales tax noncompliance during acquisition due diligence.
and there's and more.
So to answer the question we asked ourselves: No it isn't a good idea to ignore tax obligations for 2022.
In this article, we cover three things SaaS businesses must know regarding taxes. Much of it is taken from my chat with Rachel, and you can play the complete 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 location of the seller.
Taxes on sales are a bit complicated (especially those in the U.S.), but in general, the thing to be aware of is that sales tax is taken into account where the product is realized (aka the location where your client is). It's not 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 billing and the IP address of the computer. The name suggests that SaaS is taxed in the same way as items, not as services and therefore only 20 of 45 U.S. states that have sales tax regimes are actually taxing SaaS. And since 2018, if you have enough taxable sales in a area that is greater than the limit, you're considered to be in economic nexus (a big shoutout to South Dakota v. Wayfair for this idea! ).
A sales threshold is the number of sales you have in a specific region before you are required to file taxes. Each tax region (whether it's at a national, state, territory, or country at a global level) is unique in delineating an appropriate threshold.
2. The Tax Laws and Regulations have dramatically changed over the past 10 Years
Sales taxes, VAT and various other taxation related to transactions have been undergoing significant changes in the past ten years. Some changes are more important than others and have changed the tax landscape completely.
Two major changes in history comprise:
- 1 January 2015 on the 1st of January, 2015, the EU began requiring software sellers to collect and remit VAT in accordance with the place of the purchaser and not on the place of operation for the seller's company or employees.
- In 2018, The U.S. Supreme Court ruled that states are allowed to charge sales tax on purchases made through sellers located outside the state (including the internet-based sellers) regardless of whether the seller is not located in any physical presence within the taxing state ( South Dakota v. Wayfair, Inc.). (A.k.a. the reason we are writing this post is because now, nonresidents as well as small-sized businesses must understand sales tax and the way it is applied.)
The question of whether SaaS is tax deductible or not is a subject that has been re-defined in several different areas too.
In the U.S., Florida and California are not required to tax collection on sales taxes for SaaS subscriptions. However, New York and Pennsylvania do.
Massachusetts didn't require sales tax collection for SaaS. In 2020, however, the state reclassified SaaS fees as "personal tangible property" which means SaaS subscriptions will be subject to sales taxes in the state.
These changes aren't only occurring in the U.S.
In our conversation, Rachel offers several examples of tax changes for SaaS organizations around the world.
The point isn't that every SaaS founder or CEO has to be a tax expert not at all.
What's important is that you need to know enough about tax preparation to be sure you are making it the right way and to find a tax partner you can count on.
3. If You've Done It Correctly There's no reason to owe anything Extra
"If you're doing things right technically, then it's zero to you," Rachel explained.
Tax on sales is a consumption tax -a cost on the customer, not on your business. It shouldn't be something you're having to pay out of pocket. But it is up to you to collect sales tax on the buyer's behalf, and then remit it to the right public agency. It's a buyer's liability and a seller's responsibility.
"It's when you're doing it wrong that it becomes an cost and a obligation in your balance account. In the event that you don't, you're unlikely to assess sales tax two years after it was due. Therefore, it's completely from your pocket."
4 Strategies SaaS Companies Can Manage Sales Taxes and VAT
How do SaaS firms determine the taxes they need to withhold and remit around the world?
Four approaches we observe SaaS companies employ to satisfy the tax obligation related to transactional taxes:
1. Ignore It
As we've described in this piece, delaying sales tax is a common approach -- yet one that can leave your company with many years of tax back or fees and penalties. The period in which this method will work are waning. While online shopping continues to grow, so does the drive and ability to regulate it.
2. Self-Help
Making your taxes yourself is a good option in larger businesses that have enough resources to handle it effectively with an in-house team.
But it's not as easy to integrate an automatic tax tool to the sales system you use.
SaaS businesses also have to think about:
- Make sure that your data is safe and easily accessible.
- Learning about what's tax-deductible and what rate to pay.
- Monitoring tax thresholds to know when you'll have to pay taxes and file tax returns.
- Paying the right amount and filing returns on time for all tax jurisdictions where there is an obligation. It could be a every month, each quarter, or every year.
- Be aware of the latest tax law and rules.
- Answering inquiries and notices from the tax officials. Is it phishing, or can it be taken action?
This can be burdensome for finance departments that do not have knowledge of technology and may cause discontent as well as turnover.
3. Employ an accounting firm
If you contract out your tax preparation as a result, you'll have less internal resources to be utilized, but it's going to cost more. And rather than a customized approach, hiring an accounting firm typically means they'll adopt a cautious approach that is compliant to the highest degree regardless of whether you'd like to have a more personalized approach.
It's an insight that only an expert in-house could provide -- one which requires a thorough understanding of the company strategy, the tax regulations, and the ways in which they intersect.
4. Make use 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, making us responsible to collect and pay taxes for you. Whether you're trying to manage lower tax rates, custom taxation, tax-exempt transactions B2C, or B2B- everything is handled for you.
Merchants of record are in your corner should any tax audits or inquiries are raised. When an audit occurs, we intervene and assist you to ensure that you remain focused on developing and growing your SaaS business.
What's the best solution for Your Company?
Maybe this is all confusing, but the most damaging choice is nothing.
According to Rachel said, "I can never promise that you won't receive an audit. What I can promise is that small actions now can help you prepare for a much brighter future."
In order to determine what is the best option for your company She suggests analyzing the resources available and the options.
"It's essential to know your company's needs, your footprint, global tax laws (duh), and what risk you're willing to be willing to take."
