Do SaaS Companies Ignore Sales Taxes and VAT by 2022? -
One thing I've discovered while working is the widespread tendency for SaaS and software companies to not pay transaction-related taxes (sales taxes tax, VAT, GST etc. ).
And I get it.
VAT, sales taxes, and GST can be confusing, complicated and are not the things software executives want to devote their time.
However, it is important to know that ignoring transaction-related taxes can lead to a risk that goes beyond the payment of the tax back sometime in the near future.
I sat down with 's the Global Tax Director Rachel Harding, the most knowledgeable person I've met about this topic.
She told me about:
- 40% penalties and interest Software companies have incurred 40% interest and penalties 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 plus.
So to answer our own question: no tax evasion is not a good idea for 2022.
In this post we will discuss three important things SaaS companies need to understand about taxes. Much of it is taken from my conversation with Rachel, and you can also stream the full video of our conversation if you want to hear the full range of her thoughts.
3 Important Things SaaS Companies Need to Understand about Sales Taxes
1. Sales Taxes are Calculated Based upon the Place of Residence of the Buyer, not the Seller.
Taxes on sales are a bit complicated (especially in places like the U.S.), but generally speaking, what's important to be aware of is that sales taxes are paid where the item is consumed (aka where your customer is located). It's not determined based on the location of your business as well as the area of the headquarters for your business.
In practice, the most relevant data used to determine the source of sales is billing information and computer IP address. Like the title suggests, SaaS is taxed similarly to items, not as services and therefore only 20 of 45 U.S. states that have sales tax regimes actually tax SaaS. In the year 2018, if you've got enough taxable sales in a zone that exceeds the threshold, you will be legally considered to have economic cross-border nexus (a big shoutout to South Dakota v. Wayfair for this concept! ).
A threshold for sales is the number of sales you have in a specific jurisdiction before you have to submit taxes. Each tax region (whether it's at a national, territorial, state or country or a national level) offers its own method of defining an appropriate threshold.
2. Tax Laws and Regulations Have dramatically changed over the past 10 years
Sales taxes, VAT, and other transaction-related taxes have seen a significant change in the past ten years. Some changes are more important than others and changed the tax landscape completely.
Two major changes in history are:
- 1 January 2015, the EU started requiring software vendors to collect VAT and to remit it based on the location of the buyer -- not the place of operation for the company's employees or of its headquarters.
- In the year 2018 it was the year that The U.S. Supreme Court ruled that states can impose sales tax for purchases from out-of-state sellers (including those selling online), even if the seller does not have an actual presence in the state that taxes it ( South Dakota v. Wayfair, Inc.). (A.k.a. why we wrote this article since now nonresidents as well as small-sized businesses must be aware of sales tax and the way it is applied.)
If SaaS is considered taxable is a subject that has been re-defined in several sectors as well.
Within the U.S., Florida and California are not required to collection of sales taxes 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 fees to "personal tangible property," which means SaaS subscriptions now are tax-exempt within the state.
They're not just occurring within the U.S.
In our interview, Rachel offers several examples of tax changes for SaaS companies around the world.
It's not that every SaaS founder or CEO has to be an expert in taxation not at all.
The point is that you need to know enough to care about making it the right way and to find a tax partner who you trust.
3. If You Do It Right There's no reason to owe anything Additional
"If you do it right technically, then it's zero for you." Rachel explained.
The sales tax is a consumptive tax -- it's a tax on the customer, not your company. It shouldn't be something you're spending money on. But it is up to you to to collect taxes on the client's behalf and then remit it to the appropriate department of government. The buyer is responsible, but a seller's obligation.
"It's the moment you're doing it wrong that it becomes an expense and obligation on your balance sheet. Feasibly, you're not going to assess sales tax two years after it's due. Then it's out of pocket."
4 Strategies SaaS Companies Can Manage Sales Taxes and VAT
So how do SaaS companies figure out all the taxes they must pay and withhold across the globe?
There are four ways we observe SaaS businesses employ to meet their tax obligations related to transactions:
1. Don't Pay Attention
In this article, ignoring sales tax is an extremely popular practice -- but it could leave your company liable for years of back taxes, fees, and penalties. The days where this approach could be effective is waning. While online shopping continues to grow, so does the drive and ability to regulate it.
2. Do It Themselves
Doing taxes on your own can be a great option for larger companies with the capacity to do it effectively with an in-house team.
It's just not as straightforward to integrate an automatic tax tool to your sales platform.
SaaS companies also need to be thinking about:
- Ensure that your information is safe and easily accessible.
- Knowing what is taxable as well as the charges to be charged.
- Checking tax thresholds for the time to determine where you'll need to remit taxes as well as file tax return.
- Remitting the correct amounts and timely filing tax returns in all tax authorities where you are required to. This can be monthly, quarterly, or each year.
- Staying informed about the latest tax law and rules.
- Answering inquiries and notices by Tax officials. Do they appear to be phishing or can it be taken action?
It can be a burden to a department that does not have the technical know-how and can lead to resentment and increased turnover.
3. Employ an accounting firm
When you decide to outsource your tax obligations it means that there's fewer internal resources needed and it's likely to cost more. In contrast to a custom method, using an accounting firm typically means they'll take a conservative approach that is compliant to the highest degree -- even if you'd like an approach that is more tailored.
The perspective is one that only an in-house tax expert is able to provide that requires understanding the business, its strategies, tax legislation, and how they are all interconnected.
4. Use an Merchant of Record (MoR) and Outsource the Liability
At , we act as the official merchant for every transaction on your website which means we are accountable for collecting taxes and remitting them on behalf of you. It doesn't matter if you're looking for lower tax rates, custom taxes, tax-exempt transactions B2C and B2B- everything will be handled by.
The merchant of record is there to assist you if any tax audits or inquiries are raised. In the event of an audit, we intervene and take the lead to ensure that you stay focused on building and growing your SaaS company.
What's the most effective solution for your company?
Maybe this is all overwhelming, but the worst choice is to do nothing.
In the words of Rachel put it, "I can never promise that you will or won't get audited. What do I can promise is that small steps now could set you up for a more brighter and better future."
In order to determine what is the best option for your company She suggests analyzing the resources available and the choices.
"It's really knowing the business you operate, the footprint of your business, tax regulations (duh) as well as the risks you are willing to take on."
