Do SaaS Companies Ignore Sales Taxes and VAT in 2022? -
One thing I've learned while working at is that it's common for SaaS and software companies to disregard transaction-related tax (sales taxes tax, VAT, GST etc. ).
And I get it.
Taxes on sales, VAT and GST are complex, confusing and not something software leaders want to spend their time.
But also, you should know that ignoring transaction-related taxes could result in the need to pay some back taxes later in the near future.
I had a chat with Global Tax Director Rachel Harding, the most knowledgeable person I've met about this topic.
She shared with me:
- 40% interest and penalties she's seen software companies accrue in the event of ignoring the sales tax laws of states.
- Multi-million dollar valuation adjustments from historical sales tax noncompliance during acquisition due diligence.
Plus much more.
To answer our own question: No it isn't a good idea to ignore tax obligations in 2022.
In this piece, we cover three things SaaS businesses must know concerning taxes. The majority of the content is derived from my chat with Rachel as well as you may watch the entire audio of our discussion if you want to hear the full range of her thoughts.
Three Things SaaS Companies Need to Understand about Sales Taxes
1. Sales Taxes are calculated based on the Location of Buyer Not the Seller.
Sales tax is a complicated issue (especially in countries like those in the U.S.), but generally, what you need to remember is that sales tax is paid where the item is being consumed (aka the place where your customer is). It's not determined based on the location of your business, or the location of the headquarters for your business.
In reality, the most meaningful data for sourcing sales is billing information and computer IP address. The name suggests that SaaS is taxed the same way as items, not as services, meaning only 20 of 45 U.S. states with sales tax systems have tax rates that tax SaaS. In 2018if there are sufficient taxable sales within a zone that exceeds the threshold, then you are legally considered to have economic connection (a special shoutout for South Dakota v. Wayfair to explain this concept! ).
A sales threshold refers to the number of sales you can make in a particular region before you are required to pay taxes. Each tax zone (whether it's at a national, state, territory, or a country-wide level) has unique ways of defining a threshold.
2. The tax laws and regulations have Significantly changed in the last 10 Ten
Taxes on sales, VAT and other transaction-related taxes have seen a significant change over the last ten years. Certain adjustments are more crucial than others and changed the tax landscape completely.
Two major changes in history are:
- 1 January 2015 The EU has begun requiring software providers to collect VAT and to remit it according to the location of the buyer -- not the address of the company's employees or of its headquarters.
- In the year 2018 in 2018, in 2018, the U.S. Supreme Court ruled that states may charge sales tax for purchases 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 state that taxes it ( South Dakota v. Wayfair, Inc.). (A.k.a. why we wrote this post is because now, nonresidents and small businesses need to know about sales tax and the way it is applied.)
The question of whether SaaS is tax-deductible has changed in many sectors as well.
In the U.S., Florida and California are not required to payment of sales tax on SaaS subscriptions. But New York and Pennsylvania do.
Massachusetts didn't require sales tax collection for SaaS. In 2020, however, the state reclassified SaaS charges in the category of "personal tangible property," that means SaaS subscriptions will be tax-exempt in the state.
And these changes aren't just being experienced within the U.S.
In our interview, Rachel offers several examples of how taxes are changing for SaaS organizations around the world.
It's not that each SaaS founder or CEO needs to be a tax expert not at all.
The point is that you must be aware enough to care about making it the right way and to find an IRS partner that with whom you are able to trust.
3. If You Do It Right There's no reason to owe anything More
"If you're doing things right technically, then it's zero to you," Rachel explained.
Sales tax is a consumption tax -a cost to the consumer and not your company. This shouldn't be a tax you're having to pay out of pocket. But it is up to you to take the sales tax on your buyer's behalf, and then remit it to the appropriate public agency. The buyer is responsible, but a seller's obligation.
"It's the moment you're doing it wrong that it becomes an expense , and even a liability on your balance sheet. It's possible, but you're not likely be able to charge a sales tax two years after it was due. So then it's all out of pocket."
The Four Ways SaaS Companies Can Manage Sales Taxes and VAT
How do SaaS firms determine the tax they have to pay and withhold across the globe?
There are four ways we see SaaS companies employ to satisfy the tax obligation related to transactional taxes:
1. Ignore It
In this article, ignoring sales taxes is a very popular practice -- but one that can leave your business liable for decades of unpaid taxes or fees and penalties. The time frame in which this strategy can work is shrinking. While online shopping continues to expand, so does the drive and ability to manage it.
2. They'll do it themselves
Making your taxes yourself can be a great option for companies that have the resources to manage it effectively with an in-house team.
However, it's not as simple as plugging an automatic tax tool to the sales system you use.
SaaS businesses also have to be thinking about:
- Make sure that your data is safe and easily accessible.
- Knowing what is taxable as well as the rate to pay.
- Checking tax thresholds for the time to determine when you'll have to pay taxes and submit tax return.
- Paying the right amount and filing returns on time in all tax authorities where you have an obligation. It could be a either quarterly or monthly. annually.
- Staying informed about changing tax laws and regulations.
- Answering inquiries and notices by tax authorities. Do they appear to be phishing or is it actionable?
This can be burdensome for a finance department without knowledge of technology and may cause discontent and turnover.
3. Find an Accounting Firm to hire
If you contract out your tax preparation it means that there's fewer internal resources needed, but it's going to be more expensive. And rather than a customized approach, hiring an accounting firm typically means they'll take a conservative approach and ensure compliance to the maximum extent regardless of whether you would prefer an approach that is more tailored.
There's a perspective that really only an in-house tax expert can provide -- one that is based on understanding the business strategy, the tax laws, and how they intersect.
4. Utilize the services of a Merchant of Record (MoR) and outsource the Liability
At , we act as the official merchant for all transactions on your site and are responsible for collecting and remitting taxes for you. If you're looking to handle lower tax rates, custom taxes, tax-exempt transactions B2C or B2B -- everything will be handled by.
Merchants of record are in your corner should any tax audits or inquiries arise. When an audit occurs We intervene to assist you -- so you can concentrate on building and growing your SaaS company.
What's the most effective solution to your business?
Perhaps this seems overwhelming, but the worst choice is nothing.
In the words of Rachel stated, "I can never promise that you won't get audited. But what can I can assure you is that small steps now could make you a better candidate for more brighter and better future."
In order to determine what is the best option for your company She suggests analyzing your resources and your options.
"It's essential to know your company's needs, your footprint, global tax regulations (duh) and the risks you are willing to take on."
