Are SaaS Companies Ignore Sales Taxes and VAT up to 2022? -

One thing I've observed during my work is the way it is common for SaaS and software companies to not pay transaction-related taxes (sales taxes, VAT, GST, etc. ).

And I get it.

The taxation of sales taxes, VAT, as well as GST are complicated as well as confusing. They aren't something IT leaders would like to devote their time.

It is nevertheless important to consider the possibility that postponing tax-related transactions may result in the need to reimburse the tax in the future.

I spoke to the Global Tax Director Rachel Harding, the most knowledgeable person I've met on this topic.

She shared with me:

• 40% penalties and interest Software firms have paid fees and charges of 40% for ignoring taxes related to sales within the State.
• Multi-million dollar valuation adjustments from historical sales tax noncompliance during acquisition due diligence.

Plus, there's more.

In answer to the question we asked ourselves: Yes You shouldn't be ignoring taxes until 2022.

In this post, we'll examine three key aspects SaaS companies must be aware of about taxes. A majority of this content is derived from my conversation with Rachel who you can play all of the audio from our discussion if you want to hear every word she says.

Three Things SaaS Companies Need to Understand Concerning Sales Taxes

1. Sales Taxes are calculated based on the location of the buyer, not the location of the seller.

Taxes on sales are a bit complex (especially for those who live in the U.S.), but typically, the most important thing to remember is that sales tax rates will be calculated according to when the product is consumed (aka in the area where your customers are). They are not calculated according to your place of business or location of the headquarters for your company.

The most meaningful data for sourcing sales is billing data along with the machine's IP address. The name suggests it is SaaS is taxed the same way as items, not as services which implies that only 20 of the 45 U.S. states with sales tax systems that actually tax SaaS. Since the year 2018, if you've got enough taxable transactions in the zone which exceeds the threshold then you're considered to have economic connection (a huge shout-out for South Dakota v. Wayfair to explain this idea! ).

A threshold for sales is the amount of sales you are able to make in one particular area before you have to file taxes. Each tax area (whether it's at a national or state, territorial, or at the country level) offers its own method of setting the threshold.

2. Tax Regulations and Regulations Have dramatically changed over the past 10 Years

Sales taxes, VAT and other taxation related to transactions have undergone a significant change in the past ten years. Certain developments are more important than others and changed the tax landscape completely.

Two important changes that occurred in the past comprise:

• From January 1, 2015 on the 1st of January, 2015, the EU began requiring software providers to collect and collect VAT in accordance with the place of the buyer and not on the place of business or its employees.
• It was in 2018 that year in which the U.S. Supreme Court ruled that states are able to impose sales tax on sales made by sellers that aren't in the taxing state (including those selling on the internet) regardless whether or not they reside in the state that taxes it ( South Dakota v. Wayfair, Inc.). (A.k.a. this is the main motive behind this post is because now, nonresidents and small businesses should be aware of sales tax and how it's implemented.)

If SaaS is tax-deductible has been modified in a variety of sectors too.

The U.S., Florida and California are not required to pay taxation of 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 changed its classification to place SaaS fees in the category that is "personal tangible property," which means SaaS subscriptions are tax-free in the state.

These changes aren't only occurring across the U.S.

In our conversation, Rachel offers several examples of how taxes are changing for SaaS organizations around the world.

It's not the case that each SaaS chief executive or founder has to be an expert in taxation not at all.

The point is to be informed enough to be able to handle doing it in the correct approach and also to locate an IRS company that is reliable.

3. If you've done the right thing If You've Done It Correctly, You Don't Have to pay anything extra

"If you're doing it correctly technically, then there's no problem in your favor," Rachel explained.

The tax on sales is a consumptive tax -- a tax to the consumer and not your corporation. There is no reason to have to be spending money on. But, it's the duty for you to collect taxes on your client's behalf and then return it to the appropriate public agency. It's a buyer's liability and a seller's responsibility.

"It's when you're doing something wrong that it becomes an expense , and even an expense on the balance on your account. You could do it, but you're unlikely to charge a customer sales tax for two years after the tax was due. Then it's out of the pocket of your customers."

4. Strategies SaaS Companies Can Manage Sales Taxes as well as VAT

How do SaaS businesses determine all the taxes they must collect and pay around the world?

The four strategies we've observed SaaS firms employing to fulfill the tax obligation related to transactional taxes:

1. Do not ignore It

In this article, we've talked about, not paying sales tax is a common practice, but it can make your company liable for several years of tax refunds or penalties and fees. The time frame in which the strategy is able to work has been diminishing. As online shopping continues to grow, so will the demand and capacity to handle it.

2. Self-Help

Doing taxes on your own is a good option in large companies that have the capacity to do tax work with an internal team.

It's however not as simple as integrating an automated tax tool with the sales system.

SaaS companies also need to think about:

• Make sure that your personal data is safe and easy to access.
• Knowing what is taxable as well as the rate to pay.
• Checking tax thresholds for the date to establish the deadline to pay taxes and submit the tax return.
• Invoicing the proper amounts and submitting tax returns in time for all tax-related authorities in which you are required to. This could happen monthly, quarterly or even annually.
• Staying informed about modifications to taxes and tax regulations.
• Responding to notices and inquiries by the tax authorities. Are they phishing or is it a legitimate issue?

This could be difficult for a finance department without experience in technology. It could result in discontent and an increase in turnover.

3. Employ an accounting firm

If you choose to outsource the tax obligation, this means that your internal resources are less required and will likely be more expensive. Instead of a custom method employing an accounting company typically means they'll take a conservative approach and ensure compliance to the maximum extent regardless of whether you'd like to have an individual approach.

This perspective is one only an in-house tax expert can provide -- one that's based on understanding the business strategy as well as the tax law and the way they're connected.

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

As a company, we are the primary merchant on every transaction on your website, and are responsible for collecting taxes and remitting them for you. If you're looking to handle reduced tax rates, custom taxation, tax-exempt transactions, B2C or B2B -everything is covered for you.

The merchant of record is also at your side if any questions or audits on taxation come up. If an audit is required, we will step in to help you -- so you're not distracted from building and expanding your SaaS company.

What's the best solution for Your Company?

The possibility is that it all appears overwhelming, however the worst choice is nothing.

Like Rachel has said, "I can never promise that you won't get audited. All I promise is that I can assure you is that even small actions now taken will make you a better prospect for a brighter future."

In order to determine which is the most effective for your company It is recommended to look at the sources that are available as well as the options.

"It's all about knowing the details of your company, its footprint, the global tax law (duh), and what risks you are willing to risk."

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

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