Are SaaS Companies Ignore Sales Taxes and VAT until 2022? -
One thing I've learned while working at is how common it is for SaaS and software companies to disregard transaction-related tax (sales taxes such as VAT, GST, and so on. ).
And I get it.
VAT, sales taxes, and GST can be confusing, complicated, and not what software leaders want to spend their time.
But also, you should consider that delaying tax-related transactions has risks well beyond paying certain back taxes at some time in the near future.
I had a chat with Global Tax Director Rachel Harding, the most knowledgeable person I know about this topic.
She shared with me:
- 40% penalty and interest She's witnessed software companies incur 40% in interest and penalties when they've ignored taxes on sales in the state.
- Multi-million dollar valuation adjustments from historical sales tax noncompliance during acquisition due diligence.
and many and more.
To answer our own question: No it isn't a good idea to ignore tax obligations until 2022.
In this piece, we cover three things SaaS firms must be aware of about taxes. The majority of the content is derived from my discussion with Rachel as well as you may also stream the full video of our conversation if you want to hear all her insights.
Three Things SaaS Companies Need to Understand About Sales Taxes
1. Sales Taxes Are Calculated Based on the location of the Buyer, Not the location of the seller.
Sales tax is a complicated issue (especially those in those in the U.S.), but generally, what you need to remember is that sales tax is taken into account where the item is being consumed (aka the place where your customer is located). It's not determined based on the location of your business, or the location of the headquarters for your business.
In practice, 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 products, but not services which means that only 20 out of the 45 U.S. states that have sales tax systems are actually taxing SaaS. And since the year 2018, if you've got enough taxable sales in a zone that exceeds the threshold, you will be considered to be in economic cross-border nexus (a special shoutout for South Dakota v. Wayfair for this idea! ).
A sales threshold refers to the quantity of sales that within a certain area before having to submit taxes. Each tax zone (whether it's a territory, state, territory or even a national level) is unique in setting a threshold.
2. 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. Certain adjustments are more crucial than others, and they have altered the entire landscape.
Two significant changes have occurred in the past are:
- 1 January 2015 The EU began requiring software sellers to collect VAT and to remit it based on the location of the buyer -- not the address of the company's employees or of its headquarters.
- In 2018, in 2018, the U.S. Supreme Court ruled that states can impose sales tax on purchases made by sellers outside of the state (including those selling online) regardless of whether the seller is not located in a physical presence in the state that taxes it ( South Dakota v. Wayfair, Inc.). (A.k.a. the reason we are writing this article since now nonresidents as well as small-sized businesses must know about sales tax and the way it is applied.)
Whether SaaS is tax deductible or not has changed in many sectors as well.
In the U.S., Florida and California are not required to tax collection on sales taxes for SaaS subscriptions. But New York and Pennsylvania do.
Massachusetts didn't require sales tax collection for SaaS. However, in 2020 the state classified SaaS fees to "personal tangible property," that means SaaS subscriptions will be in the tax bracket of sales taxes within the state.
These changes aren't only occurring within the U.S.
In the interview, Rachel offers several examples of tax changes for SaaS organizations around the world.
It's not that every SaaS founder or CEO needs to be an expert in taxation -- far from it.
It is important to remember that you should be educated enough to take care of making it the right way and to find an accountant with whom you are able to count on.
3. If You Do It Right If You Do It Right, You Don't Have to Pay Anything Additional
"If you're doing it correctly technically, the net zero is not a problem for you," Rachel explained.
Sales tax is a consumption tax -a cost on the consumer, not on your business. You shouldn't have to be spending money on. But it is up to you to collect taxes on the buyer's behalf, and then pay it back to the right public agency. The buyer is responsible and a seller's responsibility.
"It's when you're doing something incorrectly that it's a cause for expense , and even a liability on your balance report. In the event that you don't, you're unlikely to assess sales tax for two years after the tax was due. So then it's all out of pocket."
4 Strategies SaaS Companies Can Manage Sales Taxes and VAT
How do SaaS companies figure out all the tax they have to withhold and remit across the globe?
There are four ways we observe SaaS businesses employ to meet the tax obligation related to transactional taxes:
1. Don't Pay Attention
In this post, not paying sales taxes is a very frequent practice, but one that can leave your company with years of back taxes or fees and penalties. The period in which this method could be effective is waning. While online shopping continues to grow, so does the drive and ability to control it.
2. Self-Help
Doing taxes on your own is a good option for larger companies with the capacity to do it effectively with an in-house team.
It's just not as straightforward as plugging the tax software of your choice into your sales software.
SaaS businesses also have to consider:
- Make sure that your data is clean and accessible.
- Understanding what's taxable and the charges to be charged.
- Monitoring tax thresholds to know when you'll have to pay taxes and file tax return.
- Making sure you pay the proper amount and timely filing tax returns to all tax-related jurisdictions in which you have an obligation. This could be either quarterly or monthly. annually.
- Be aware of changing tax laws and regulations.
- Responding to notices and inquiries from tax officials. Is it phishing, or can it be taken action?
It can be a burden for finance departments that do not have knowledge of technology and may cause discontent as well as turnover.
3. Find an Accounting Firm to hire
When you outsource your taxes as a result, you'll have fewer internal resources needed, but it's going to cost more. Instead of a custom strategy, employing an accounting company usually implies they'll take a conservative approach with maximum compliance -- even though you'd prefer to have a more personalized approach.
It's an insight that only an expert in-house can provide -- one that requires understanding the business and its tax strategies, regulations, and the ways in which they intersect.
4. Use an Merchant of Record (MoR) and Outsource the Liability
We are the official merchant for the transactions you make on your site which means we are accountable for collecting and remitting taxes for you. If you're looking to handle reduced tax rates, customized taxation, tax-exempt transactions B2C or B2B -- everything is taken care of for you.
The merchant of record is also at your side if any tax audits or inquires are raised. If an audit happens then we step in and assume the responsibility and allow you to concentrate on building and expanding your SaaS business.
What's the best solution to your business?
Maybe this is all over the top, but the best option is nothing.
As Rachel said, "I can never promise that you'll never get audited. What can I can assure you is that small actions now can help you prepare for a far brighter prospects in the future."
For determining what's the most effective for your company, she recommends assessing the resources available and the choices.
"It's essential to know your company's needs, your footprint, global tax regulations (duh), and what risks you are willing to accept."
