Do SaaS Companies Ignore Sales Taxes and VAT until 2022? -

One thing I've seen in my research is the general tendency of SaaS as well as software firms to overlook transaction-related tax (sales taxes such as VAT or GST. ).

And I get it.

Taxes on sales Taxes on sales, VAT and GST are complicated, confusing and do not represent the areas IT executive would rather invest their time.

Be aware that delays of tax-related transactions can result in you having to pay certain taxes at some point later on.

I had lunch with Global Tax Director Rachel Harding, one of the most knowledgeable people I have had the pleasure of getting to know on this subject.

She told me:

• Penalties of 40% and interest She's witnessed software firms incur 40% of interest and penalties in the event of violating sales tax laws of the state.
• Multi-million dollar valuation adjustments from historical sales tax noncompliance during acquisition due diligence.

And there's even many other.

In order to answer this question We asked ourself: Yes, it isn't the most effective way to go about ignoring the tax obligation for 2022.

In this article, we will go over three key elements SaaS companies must be aware of in relation to taxes. The majority of the information was gathered from my conversations with Rachel, and you can listen to the entire audio recordings of our chat for those wanting to experience the entire array of Rachel's ideas.

Three Important Things SaaS Companies Need to Understand regarding Sales Taxes

1. Sales Taxes are calculated based on your location as a buyer rather than the place of Seller.

Sales taxes are a bit complicated (especially those within the U.S.), but in general, one thing to remember is that sales taxes will take into consideration where the product is realized (aka the place that your customer is). This isn't based upon the location you're located in or the area which is where you have your company.

The most important information in selling is the billing information and the IP address for the machine. It's clear that SaaS is taxed in the similar way as other products but not as services. So, just 20 of from all U.S. states that are subject to sales tax laws are taxing SaaS. For the year 2018 when you have the quantity of sales that are tax deductible in a region that is greater than the amount required, then you're believed to have the economic relationship (a special thanks for South Dakota v. Wayfair to this idea! ).

A threshold for sales is the number of sales you could make in one region prior to when the deadline to submit tax returns. Each tax region (whether it's a state, nation, state, territory or even a nation globally) is unique in delineating the appropriate threshold.

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

Sales tax taxes, VAT, and all other taxation related to transactions have experienced substantial changes over the past decade. Certain changes are more significant than others, which has altered the tax landscape totally.

Two significant changes throughout the course of human history are:

• 1 January 2015 , on the 1st day of January, 1 January 2015, the EU has begun requiring software providers to take VAT payments and collect it in accordance with the country in which they purchase instead of the country of operation of the company of the seller or its employees.
• In 2018, the U.S. Supreme Court ruled that states are able to assess sales tax on purchases made by sellers outside the state (including the internet-based sellers) regardless of whether the seller is located in the physical location of the state taxing ( South Dakota v. Wayfair, Inc.). (A.k.a. The reason why we're writing this post is because now, nonresidents as well and small businesses should be aware of sales tax as well as how it's utilized.)

The question of whether SaaS is tax-deductible, or not is a question that has been recast many different fields also.

It is true that the U.S., Florida and California don't have to collect taxes on subscription sales. SaaS subscriptions. However, New York and Pennsylvania are required to tax the sales tax for subscriptions.

Massachusetts didn't require sales tax collection for SaaS. However, in 2020 the state has changed its classification of SaaS charges as "personal tangible assets" This means SaaS subscriptions can be tax-free within the state.

These changes aren't just on the U.S.

In the discussion, Rachel offers several examples of tax-related tax changes applicable to SaaS enterprises around the world.

There's no reason that each SaaS chief executive or founder has to become a tax professional in any way.

It is crucial that you have a good understanding of tax planning so that you can be certain that you're taking the correct approach and find a tax partner that you can count on.

3. If you've followed the procedure properly, you don't need to be owed any more money

"If your following correct process technically, then it's not an issue to the rest of us." Rachel said.

Tax on sales is form of tax that is imposed on the consumption of goods and services - it's a cost paid by the consumer rather than your business. It shouldn't be an expense that you have to pay from your pocket. But it is up to you to pay the sales tax on the buyer's behalfand remit it to the appropriate public authority. The buyer is responsible and the seller's liability.

"It's when you've made wrong that you're liable for an expense and an obligation on your balance. If you don't, you're unlikely to be able to claim sales tax during the 2 years that follow the tax was due. So, the tax will come entirely from your wallet."

Four Strategies SaaS Companies Can Manage Sales Taxes as well as VAT

What is the process by which SaaS companies decide what taxes they have to be taxed and then pay other companies around the globe?

We've observed four distinct approaches SaaS companies employ to satisfy the tax obligation related to transactional tax.

1. Do not ignore It

This article explains that delaying taxation on sales is an increasingly well-known strategy, but it can result in your business being faced with years of penalty or tax refunds or fees. The period of time during which this strategy is beneficial is decreasing. As online shopping expands, so too does the desire as well as the capacity to manage it.

2. Self-Help

Tax preparation by yourself is an option that can work in large companies with the capacity to manage it efficiently using an in-house staff.

It's not as easy to connect an automated tax tool to the sales program you use.

SaaS businesses also have to think about:

• Be sure your information is safe and easily accessible.
• Understanding what is tax-deductible as well as what tax rate you must pay.
• Checking tax thresholds for the time to determine when it's time to file taxes and pay tax return.
• Be sure to pay the correct amount and filing tax returns within the time for tax officials in each jurisdiction that has the requirement. This could be every month, each quarter, or perhaps every year.
• Be informed of the latest tax laws and regulations.
• Response to notices and inquiries from Tax officials. Are you sure it's not scam or an issue of law?

This is a burden for finance departments that do not have the required understanding of the latest technologies, and can cause unhappiness and also the potential for the possibility of.

3. Employ an accounting firm

If you outsource your tax preparation, as a result it will allow you utilize fewer resources internally employed, however it's likely be more expensive. Instead of using a custom-made method, hiring an accounting company typically implies that they'll employ a strategy for tax preparation that's completely conforming, no matter if you'd like to have a more personalized method.

This is a knowledge that only an insider expert can provide which is dependent on a deep understanding of the strategy of the company as well as tax regulations and how they work together.

4. Utilize the services of an Merchant of Record (MoR) or outsource the work

We're the primary seller for any transactions you conduct through your website and we are your primary source for collecting and pay taxes on behalf of you. If you're looking to control the tax rate or get tax exemptions, we're here to aid you. B2C transactions, or B2B all of it will be managed by us.

Merchants registered with us can assist you should the need for tax audits or inquires occur. If an audit is triggered We can help making sure you are focused on advancing and expanding your SaaS business.

What's the most efficient way to improve the performance of your Company?

It's possible that this is all unclar, however the most dangerous choice is simply nothing.

According to Rachel she claimed that "I will never be able to guarantee there will never there be an audit. All I have to affirm is that taking some steps taken now can assist you in planning for a much brighter future."

To determine the ideal solution for your organization it is recommended to look at all the options available along with the other options.

"It's important to be aware of your company's requirements, its footprint, global tax laws (duh) as well as the risk you're willing to take."

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

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