Are there ways that SaaS Companies Afford to Ignore VAT and Sales Taxes? -

The thing that I've observed while working is that it's not uncommon for SaaS as well as software firms to disregard taxes related to transactions (sales taxes tax and VAT, GST. ).

And I get it.

Sales taxes, VAT, and GST are complex as well as confusing. They aren't something IT managers would like to invest their time.

Also, think about whether delay in tax-related transactions can lead to risks far beyond having to pay back taxes at some time within the next few years.

In one of my chats with the Director of Global Tax Rachel Harding One of the most educated individuals I know on the topic. She said:

• 40% penalties and interest the software industry has accrued in the event of ignoring taxes on sales within the state.
• Multi-million dollar valuation adjustments from historical sales tax noncompliance during acquisition due diligence.

Plus many plus.

Answering our own question The answer is: no, don't avoid VAT, sales, as well as GST tax.

In this this piece, we will discuss the five main aspects SaaS businesses need to know about taxes. The majority of this info is based on my conversations with Rachel. Below, you'll be able to stream two of our discussions to learn more.

Five Factors SaaS Companies Need to Understand about Sales Taxes

1. VAT, sales, and GST Taxes can affect SaaS Values

In the time that Rachel was working on the mergers and acquisitions tax team of software startups, she was able to observe million-dollar acquisition price changes due to tax noncompliance.

"If you're planning on making any type of ownership change regardless of whether it's a major or a minor purchase They'll want to take a look at your business," Rachel explained. "They are going to examine the entire procedure for example, such as are you aware of where your goods are tax-deductible? Are you following these regulations in collecting, remitting and paying tax? Are you compliant? In the event that you're not, your buyer may want you to fix it before purchasing it, or reduce the price of purchase."

2. If you've been doing it correctly there's no reason for you to be owed Anything Additional

"If you follow the correct procedure, technically, it's net-zero for you," Rachel explained.

The sales tax is a consumptive tax- a tax on the customer and not on your business. It shouldn't be something you're paying out of the pocket. It's still the obligation of the seller be able to collect sales tax on your customer's behalf, then transfer it to the appropriate department of government. Buyer is accountable however, it is the seller's responsibility.

"It's when you're doing mistakes that you'll end in a financial loss and a liability on your balance account. In reality, it's not possible to assess sales tax 2 years after tax was due. After that, it's paid directly from the pockets."

3. Consumption Taxes are calculated based on the location of the Buyerand not the Seller.

Sales tax is somewhat complicated (especially for countries like those located in the U.S.), but generally, what you need to remember is that sales tax will be collected where the benefit of the item is consumed (aka the place the customer's location is). Taxes don't depend on the location you're in or the place of the office of your company.

In reality, the most significant information to source sales is the invoice along with the computer's IP address. Like the title suggests, SaaS is taxed in the exact similar way to products but not services and therefore only 20 out of the forty-five U.S. states with sales tax systems tax SaaS. For the year 2018 if you've got sufficient revenue taxable within the zone that exceeds the threshold, you will be legally classified as having an economic connection (a massive shout-out goes to South Dakota v. Wayfair for the idea! ).

A threshold in sales refers to the quantity of sales in the specified area before you have to pay taxes. Each tax zone (whether it's a state, a territory state, or territorial national level) offers its own method of the definition of a threshold.

4. It is evident that the Tax Laws and Regulations have significant changes in the last 10 years.

Taxes on sales as well as VAT and different taxation relating to transactions have been reformed over the last ten years. Certain changes are more important than othersand completely changed the tax landscape.

2015. EU requires VAT collection from software companies which do not have a European base.

1 January 2015 , on 1 January 2015. The EU is now demanding that software companies take VAT payments and collect it depending on the location of the customer and not on the place of business or employees.

The rates for VAT are set by the government of the country. This means that the government is accountable for keeping up with the adjustments in these rates at a country scale.

     2018: U.S. affirms it may collect sales tax from businesses that are not residents of the United States.    

In 2018 in the year 2018 in 2018, The U.S. Supreme Court ruled that states can assess sales tax on purchases made by sellers from outside the state (including the sellers on websites) regardless of whether the seller does not reside in an actual presence in the state in which tax is levied ( South Dakota v. Wayfair, Inc.). (A.k.a. this is the main reason why we wrote this piece is that non-residents and small businesses need to be aware of sales tax and the application.)

In the U.S., sales tax rules vary state by state. Florida and California don't require the collection of sales tax for SaaS subscriptions. However, New York and Pennsylvania require it.

In 2020, Massachusetts changed the classification of SaaS fees in 2020 to "personal tangible asset" which means SaaS subscriptions will be sold with sales tax within the state.

In our discussions, Rachel offers other examples of how tax laws are developing for SaaS businesses around the world:

"We see, everywhere across the world, governments adopting rules that target foreign-owned businesses that offer digital products and services. Some will have a threshold of sales. Some of them say every dollar is taxable."

5. Global Consumption Taxes continue to become more complex

New tax legislation is getting passed which directly impact SaaS. In the near future, many countries, SaaS companies running digital platforms might have to provide information to any seller using their platform.

How come tax laws have changed?

Nations are well aware of the loss in tax income from sales made online which software firms aren't disclosing.

This is why they're attempting to discover new methods to track the movement of cash in their states or nation and to enforce the collection.

Four Ways SaaS Companies Can Manage VAT Four Ways SaaS Companies Can Manage Sales Taxes and VAT

Then how can SaaS businesses determine all the tax obligations they have to paid and withheld across the globe?

There are four strategies we have observed SaaS companies employ to satisfy the tax requirements associated with transactions:

1. Don't Pay Attention

In this piece, delaying taxes on sales is a popular technique, however it's one that could leave your business liable for decades of unpaid taxes or fees as well as penalties. The time frame in which this strategy can work is shrinking. The pace of online shopping continues to expand, so are the motives and capabilities to regulate it.

2. Self-Help

Making your taxes yourself can be an excellent option for companies that have the capacity to do efficiently using an internal team.

It's just not as straightforward as connecting an automated tax tool into your sales system you use.

SaaS companies also need to think about:

• Make sure that all your personal information is secure and easily accessible.
• Learning about what's tax-deductible and what charges to be charged.
• Monitoring tax thresholds to know when it is time to make tax payments and file a taxes.
• Paying the proper amount and filing tax returns in time with all tax authorities in which there is an obligation. This can be applicable to a month either in a monthly, quarterly, or even an annual.
• Be aware of the latest tax laws and regulations.
• Responding to inquiries and notices from tax authorities. Do they consider it phishing? Or is this a legal problem?

This could be difficult for a finance department without technical expertise and cause anger and increased turnover.

3. Employ an accounting firm

If you decide to contract out your tax preparation as a result, you'll have fewer internal resources needed, but it's going to increase the cost. Instead of a custom plan, hiring an accounting firm usually means that they'll take a more cautious approach and make sure that compliance is met to the highest possible degree regardless of whether or not you'd like something more customized.

It's a knowledge that only an internal tax professional can offer -- one that involves understanding your business and its tax strategies, laws, and the ways they all intersect.

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

As a company, we serve as the sole merchant on any transactions you make on your website and responsible of collecting and remitting tax for you. There's no need to worry about trying to deal with reduced tax rates, custom taxation for tax-exempt transactions, B2B or B2C -everything is managed by us.

The record-keeping merchant is on your side should you have tax audits or questions that are raised. If an audit happens then we step in and take the lead so that you can focus on expanding and building your SaaS business.

Which is the most efficient method for Your Company?

The possibility is that the whole seems too overwhelming, but it's not the best choice to act.

As Rachel put it, "I can never promise that you won't get audited. However, what I promise is that I can promise is that small steps taken today will prepare you for a far brighter prospects for the near future."

For determining what's the most effective for your company, she recommends assessing your strengths and possibilities.

"It's all about understanding the business you operate as well as the size of your business, tax law (duh) in addition to the risk you're willing to assume."

Check out my complete interviews with Rachel Harding

Part 1: The Main Reasons SaaS Companies Can't Afford to ignore Sales Taxes

Part Two: What the tax laws more strict? mean for SaaS

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

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