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

What I've noticed during my work has been that it's not uncommon for SaaS as well as software companies to not charge transaction-related tax (sales taxes TVA, GST, etc. ).

And I get it.

VAT, sales taxes and GST can be very confusing as well as complicated. They are is not an area IT managers would want to devote their time.

Also, think about whether delaying tax-related transactions has risks well beyond paying certain back taxes sometime in the near future.

I had a conversation with the Tax Director for the world, Rachel Harding, the most knowledgeable person I've met regarding this issue.

She told me about:

• 40% penalty plus interest Software companies have been charged 40% in interest and penalties if they've not paid taxes on sales in the state.
• Multi-million dollar valuation adjustments from historical sales tax noncompliance during acquisition due diligence.

Plus numerous others.

For our own answer: no it isn't wise to disregard tax obligations until 2022.

In this post this article, we discuss three issues SaaS companies must be aware of regarding taxes. Much of it is taken from my chat with Rachel who you can watch the whole video of our discussion if you're interested in hearing the full range of her views.

Three things SaaS Companies Need to Understand About Sales taxes

1. Sales Taxes are Calculated Based upon the place of purchase not the seller.

Sales tax is quite difficult (especially for countries such as that of the U.S.), but typically, the most important thing to remember is that sales tax are collected in the place where the profit of the item is consumed (aka the location in which your customer is). This isn't determined by the location of your business or even the location of your office of your company.

The most crucial data to identify the origin of the sales comes from the invoice along with the computers IP address. This implies the fact that SaaS is taxed in the exact similar way to products but not as services. That means only 20 out of the all U.S. states with sales tax systems actually taxing SaaS. Since 2018if there are sufficient taxable sales within an area to exceed the amount allowed, the law says that you've got economic cross-border nexus (a massive shout-out goes for South Dakota v. Wayfair for this idea! ).

A threshold for sales is the amount of sales you can make within a certain region before you have to file taxes. Every tax area (whether it's on a territorial, state or country level) has its own way of defining a threshold.

2. The Tax Laws and Regulations have Changed Dramatically in the Last Ten Years.

VAT, sales taxes and the other taxes associated with transactions have been altered in the past ten years. Certain adjustments are more crucial in comparison to others and have altered the tax landscape completely.

Two significant changes have occurred in the past are:

• Beginning January 1 of 2015, on the 1st day of January 2015 The EU began demanding that software companies take VAT payments and collect it according to the location of the customer not the actual location of the company or its employees.
• In 2018 , it was the year that The U.S. Supreme Court ruled that states can impose sales tax on purchases made from out-of-state sellers (including those selling online) in spite of the fact that the seller has not an established presence in the state where it is taxed ( South Dakota v. Wayfair, Inc.). (A.k.a. The reason for writing this piece is that now all non-residents as well as businesses of every size should be conscious of the sales tax as well as the manner in which it is implemented.)

If SaaS can be tax-deductible has been a subject of debate in several different ways too.

Within in the U.S., Florida and California aren't required to pay sales tax 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 charges to be "personal tangible property" which means SaaS subscriptions will fall into the sales tax bracket. taxes within the state.

These aren't just happening in the U.S.

In our conversation, Rachel offers several examples of how tax laws are changing for SaaS businesses around the world.

It's not the case that everyone SaaS founder or CEO needs to be an expert in taxation. Far away.

Important to keep in mind that you must be aware enough about doing it right and finding an accountant that you are sure of.

3. If You've Followed It Properly If You Do It Right, You Don't Have to pay anything extra

"If you're following the correct procedure technically, then the net zero won't pose a problem for you," Rachel explained.

Tax on sales is a consumption tax -- a tax on the customer and not your company. This shouldn't be something that you're paying for. It's up to you to collect to pay the sales tax on behalf of your client and pay back to the public entity responsible. The buyer is responsible however, a seller's duty.

"It's the moment you're doing something incorrectly that you're putting it as an obligation and expense in the balance of your account. In the event that you don't, you'll be unable to assess tax on sales in the two years following when it was due. It's then out of pocket."

The Four Ways SaaS Companies Can Manage Sales Taxes and VAT

What then? How can SaaS companies determine what tax they must be withheld, and how can they pay the taxes around the world?

Four ways that we've seen SaaS firms use to satisfy the tax obligations related to transactional tax:

1. Do not pay attention

We've discussed in this article that ignoring sales tax is the most common method of doing so- yet one that can result in your company being left with years of tax back along with penalties, charges, and other fees. The length of time that the benefits of this approach are diminishing. While online shopping continues to grow, so too will the demand and capacity to control it.

2. Self-Help

Making your taxes yourself is a possibility that works great for large companies that have enough resources for dealing by having an internal staff.

But it's not as easy as adding an automated tax tool to the sales program you use.

SaaS companies also need to be thinking about:

• Check that your data is clean and accessible.
• Knowing what is taxable in addition to the tax rate to be paid.
• Monitor tax thresholds so you have a clear deadline to pay taxes and return tax return.
• Making sure that the proper amounts are paid and filing returns on time for all tax authorities in which there's an obligation. This can be every month, each quarter and annually.
• Keep up-to-date with the most recent tax laws and regulations.
• Responding to notices and inquiries of tax officials. Does it appear that they are scams or are they actionable?

This can be challenging for finance departments that do not have knowledge of technology and may cause discontent and increased turnover.

3. Employ an accounting firm

When you contract out your tax obligations, this means there are less internal resources to be employed and will likely increase the cost. And rather than a customized approach, using the services of an accountant typically means the firm will take a cautious approach that is in compliance to the top level regardless of whether you'd prefer to have an individual approach.

There's a perspective that really only an insider tax professional can provide -- one that's based on understanding the company's tax methods, regulations, and how they all intersect.

4. Use the services of an Merchant of Record (MoR) and outsource liability

As a company, we are the principal merchant for transactions you make through your website, which is why we're responsible for collecting and paying taxes on your behalf. If you're looking to handle tax rate reductions, special taxation requirements or tax-exempt transactions, B2C, or B2B- everything is taken care of by us.

Merchants of record are also at your side if you have tax audits or issues that arise. If there is an audit, we will assist and take the lead -- so you can remain focused on creating and growing your SaaS business.

What's the most effective method for Your Company?

It's possible that this all appears overwhelming, however the most ineffective thing you could do is not do anything.

As Rachel said, "I can never promise that you won't be audited. All that I can promise is that small actions now taken will make you a better potential candidate for a more prosperous and better future."

In order to determine which is most effective for your company you should evaluate the resources available and the alternatives.

"It's essential to know the requirements of your company and area of operation, in addition to the tax laws in general (duh), and what risks you are willing to take on."

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

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