Can SaaS Companies Ignore Sales Taxes and VAT in 2022? -

One thing I've observed while working is that it's not uncommon for SaaS as well as software firms to pay no transaction-related tax (sales taxes tax, VAT, GST etc. ).

And I get it.

VAT, sales taxes, and GST could be confusing, complex, and are not the things IT executives would like to focus their attention to.

But, it's crucial to remember delays in tax-related transactions may lead to a risk that goes beyond the payment of certain back taxes later in the in the future.

I spoke with the Global Tax Director Rachel Harding, the most knowledgeable person I've spoken to about the subject.

I asked her questions about:

• 40% penalties and interest Software companies have incurred 40% penalties and interest in the absence of taxes for sales made in the State of Washington.
• Multi-million dollar valuation adjustments from historical sales tax noncompliance during acquisition due diligence.

There's more.

In answer to our own question: no it isn't an ideal idea to avoid tax obligations in 2022.

In this article we will discuss three important things SaaS enterprises must be aware of in relation to taxation. Most of the information is derived from my discussion with Rachel and you can listen to the full video of our conversation in case you'd like to hear each word she had to say.

3 Important Things SaaS Companies Need to Understand Concerning Sales Taxes

1. Sales Taxes are Calculated Based upon the Place of Residence that the buyer is located not the seller.

Sales tax is a bit complex (especially those in countries like the one of the U.S.), but generally, what you need to remember is that sales tax will be taken into account where the item is used (aka the place where your customers are). The tax isn't based of where you're located, or where the headquarters of your business.

The most relevant information to source sales is the number on the invoice as along with the IP address. The title implies that SaaS is taxed in the similar way that other items are, not as services, meaning just 20 out of the 45 U.S. states that have sales tax regimes have tax rates that tax SaaS. In 2018, If you're in the range of taxable sales in your area that is greater than the threshold, you'll be classified as being in the economic cross-border connection (a huge shout-out to South Dakota v. Wayfair for this concept! ).

A threshold for sales is the maximum number of sales that you could make within the area you are in before needing to pay taxes. Each tax zone (whether it's on a global, national, state, territory, or country at the global or global level) provides its own means of delineating an appropriate threshold.

2. It is true that the Tax Laws and Regulations have changed dramatically in the last 10 years

Sales taxes, VAT, and other transaction-related taxes have been undergoing significant changes in the past ten years. Certain changes are more significant than others and have changed the tax landscape completely.

Two major changes in history include:

• Since January 1st of 2015, the EU has begun demanding that software companies take VAT, and then remit it according to the address of the customer instead of the location of their employees or its head office.
• In 2018 2018, The U.S. Supreme Court ruled that states may charge sales tax on transactions made by sellers who are not part of their state (including sellers on the internet) regardless of whether the seller doesn't have an actually presence in the state which taxes the purchase ( South Dakota v. Wayfair, Inc.). (A.k.a. This is the primary motive behind this blog post. It is due to the fact that now all non-residents and small-sized companies must be informed about sales tax and the manner in which it is implemented.)

The question of whether SaaS is tax-deductible has evolved in various sectors as well.

In the U.S., Florida and California are not required to collection of sales taxes on SaaS subscriptions. However, New York and Pennsylvania do.

Massachusetts didn't require sales tax collection for SaaS. However, in 2020 the state has classified SaaS fees under the category of "personal tangible property," meaning SaaS subscriptions are now in the tax bracket of sales taxes in the state.

The changes don't just happen only in the U.S.

In this interview, Rachel gives several instances of the way in which tax laws are changing for SaaS companies around the world.

There's no reason that every SaaS CEO or founder needs to become an expert tax expert not at all.

The point is that you need to be educated enough about how to do the right thing and find an accountant you can be certain of.

3. If You've Finished It Rightly You don't have a reason to be owed Anything Additional

"If you do it right technically, there's no net zero for you." Rachel explained.

Sales tax is a consumption tax -a cost on the buyer rather than your corporation. The tax shouldn't be one that you're paying for. You are the one who has to collect this sales tax on behalf of the client's behalf and pay back the tax to the appropriate public entity. It's a buyer's liability however, it's a seller's duty.

"It's when you're doing something incorrectly that it is a cause for an expense  and an obligation on your balance account. Feasibly, you're not going be able charge sales tax two years after the tax was due. This means that the tax is paid for out of pocket."

4 Strategies SaaS Companies Can Manage Sales Taxes and VAT

How do SaaS businesses calculate all the taxes they must collect and pay to the globe?

We have seen four ways SaaS companies employ in order to satisfy their tax obligations relating to transactions:

1. Do not ignore It

In this post, not paying sales taxes is a very frequent practice, but it can leave your business with a long-term liability of tax due as well as penalties, charges, and fees. The days that this strategy can be effective are over. While online shopping continues to expand, so does the motivation and capacity to manage it.

2. They'll do it themselves

Tax preparation by on your own is a possibility that can be beneficial for businesses with the resources needed to handle efficiently with an internal team.

It's not as simple to integrate the automated tax tool to your sales platform.

SaaS companies also need to consider:

• Make sure that the information you have is safe and easily accessible.
• Learning about what's tax-deductible and what charges to be charged.
• Reviewing thresholds for taxation in order to figure out the time when you'll have to pay taxes and submit tax return.
• Paying the proper amount as well as timely paying tax returns with every tax authority in which you have to. It could be a monthly, quarterly, or every year.
• Be informed of the most recent tax laws and tax rules.
• Responding to inquiries and notices of tax officials. Do you think it's phishing? Or is it possible to take to take action?

It can be a burden for finance departments that do not have the technical knowledge and experience, and may cause resentment as well as turnover.

3. Employ an accounting firm

If you choose to outsource your tax obligations as a result there will be fewer internal resources, but it will be higher priced. Instead of a custom method employing an accounting company typically means that they will take an approach that is conservative and will ensure maximum compliance, even if you would prefer something custom-made.

It's an insight that only an insider tax professional can provide -- one which requires a thorough comprehension of the firm it's strategies, tax laws, and the ways they all intersect.

4. Make use of the services offered by a Merchant of Record (MoR) and Outsource the Liability

We are the official merchant for the transactions you make on your site and are responsible to collect and pay taxes for you. If you're looking to handle reduced tax rates, customized taxation and tax-free transactions B2C or B2B - everything is managed by.

A merchant of record is also at your side when there is a tax audit or questions that come up. If an audit happens then we are there to help with the audit to help you concentrate on growing and developing your SaaS company.

What's the Best Solution for Your Company?

Perhaps this seems too much, but the best option is not to choose anything.

As Rachel put it, "I can never promise that you won't be scrutinized. But what do I can affirm is that taking some steps taken now can make you a better prospect for a brighter tomorrow."

In order to determine which is most effective for your company it's recommended to analyze your resources and your alternatives.

"It's all about knowing the details of your firm's footprint, global tax regulations (duh) and the risks you're willing to take."

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

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