Do SaaS Companies Ignore Sales Taxes and VAT for 2022? -

One of the things I've observed in my work is the widespread tendency for SaaS and software companies to disregard transaction-related tax (sales taxes such as VAT, GST, etc. ).

And I get it.

Taxes on sales Taxes on sales, VAT and GST are complex, confusing and are not the things IT executives would prefer to invest their time.

Consider that delay in tax-related transactions may cause you to settle certain taxes at some point in the future.

I had lunch with Global Tax Director Rachel Harding, the most knowledgeable person that I have had the pleasure of meeting on this topic.

She told me:

• 40% penalties and interest She's witnessed software firms incur 40% interest as well as penalties in the event of disregarding state sales tax laws.
• Multi-million dollar valuation adjustments from historical sales tax noncompliance during acquisition due diligence.

And there's even many more.

So to answer the question we asked ourselves: No this is not the best idea to ignore the tax obligation for 2022.

In this post We will go over three key aspects SaaS businesses must know regarding taxes. The majority of the information is derived from my chat with Rachel, and you can listen to the entire audio recording of our discussion for those wanting to listen to the full variety of her ideas.

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 seller.

Sales taxes are a bit difficult (especially those within the U.S.), but in general, the thing to keep in mind is that sales tax will be taken into account where the product is realized (aka the location where your client is). This isn't based upon the place you are located and also the location that is the location of your company.

The most meaningful data in sourcing sales is billing and the IP address of the machine. It is clear it is SaaS is taxed the same manner as other items but not services. And consequently only 20 out of the all U.S. states that are subject to sales tax laws are taxing SaaS. In the year 2018, if you've got the amount of taxable sales in an zone that is more than the threshold, then you're believed to have the economic relationship (a special thanks for South Dakota v. Wayfair for this notion! ).

A threshold for sales is the number of sales you can make in a particular region before you are obliged to file tax returns. Each tax region (whether it's a nation, state, territory or a country on a global scale) is unique in delineating the proper threshold.

2. The Tax Laws and Regulations have dramatically changed over the past 10 Years

Taxes on sales, VAT and various other taxation related to transactions have undergone significant changes in the past ten years. Some changes are more important than others, which has altered the tax landscape totally.

Two significant changes in the history of mankind are:

• 1 January 2015 on the 1st of January, 2015 1 January 2015, the EU has begun requiring software providers to collect and pay VAT depending on the country of purchase and not on the place of operation for the seller's company or employees.
• In 2018, the U.S. Supreme Court ruled that states can charge sales tax on transactions made by sellers outside the state (including the internet-based sellers) regardless of the fact that the seller has the physical location of the state that taxes ( South Dakota v. Wayfair, Inc.). (A.k.a. The reason why we're writing this post is because now, nonresidents as well and small businesses need to be aware of sales tax as well as how it's used.)

The issue of whether SaaS can be tax-deductible or not is an issue that has seen a redefining in several different areas also.

The U.S., Florida and California aren't required to collect taxes on sales on SaaS subscriptions. But, New York and Pennsylvania are required to tax sales taxes on subscriptions.

Massachusetts didn't require sales tax collection for SaaS. However, in 2020 the state has reclassified SaaS fees to "personal tangible property" this implies that SaaS subscriptions are tax-exempt within the state.

The changes don't just happen only in the U.S.

In our discussion, Rachel offers several examples of tax-related changes that are applicable to SaaS businesses around the world.

There's no reason that each SaaS founder or CEO needs to be a tax expert not at all.

It is crucial that you know enough about tax preparation so that you can be certain that you're taking the correct approach and find a tax partner who you can trust.

3. If you've done it correctly There's no reason to owe any additional money

"If you're following the correct procedure technically, it's not a problem to you." Rachel explained.

Sales tax is a tax on consumption - a cost borne by the client and not your company. This shouldn't come as a cost you're paying out of the pocket. But it is up to you to take the sales tax on the buyer's behalfand remit it to the right public authority. The buyer is responsible and the seller's liability.

"It's the moment you've done it incorrectly that it's an expense and an obligation on your balance account. If you don't, you're unlikely to be able to collect sales tax for in the two years following when the date it was due. Thus, the tax comes entirely from your wallet."

4 Strategies SaaS Companies Can Manage Sales Taxes and VAT

How do SaaS companies determine what taxes they have to be withheld and pay to the rest of the world?

We have observed four different strategies SaaS companies employ to satisfy the tax obligation related to transactional taxes.

1. Do not ignore It

We've explained in this article that delaying the tax on sales is an increasingly popular strategyhowever, it could result in your business being left with years of tax back or penalties, fees and charges. The timeframes during which this approach will prove effective is waning. As online shopping continues to grow as does the desire as well as the capability to regulate it.

2. Self-Help

Tax preparation by yourself is a good option in bigger companies with enough resources to manage it efficiently with an in-house team.

It's just not that simple to connect an automated tax tool into your sales software.

SaaS companies also need to think about:

• Be sure your information is safe and easily accessible.
• Learning about what's tax-deductible and the tax rate you should pay.
• Monitoring tax thresholds to know when you'll have to pay taxes and file tax returns.
• Making sure you pay the correct amount and filing tax returns in deadline for tax authorities in every jurisdiction in which there's the obligation. It could be a every month, each quarter, or even every year.
• Keep up-to-date with the most recent tax law and rules.
• Response to notices and inquiries by tax authorities. Do you think it's phishing or could it be a legal matter?

This can be burdensome for finance departments that don't have the necessary knowledge about the latest technology, and can cause discontent as well as the possibility of turnover.

3. Hire an accounting company

If you outsource your tax preparation as the result, you'll be able to use lower internal resources employed, however it's likely cost you more. Instead of a custom approach, hiring an accounting company typically implies that they'll take an approach to tax preparation that's fully compliant regardless of whether you'd like to have a more personalized method.

It's an insight that only an expert in-house will be able to provide, and that requires an in-depth comprehension of the strategy of the company as well as tax rules and how they interplay.

4. Use the service of a Merchant of Record (MoR) or outsource the responsibility

We are the principal merchant for transactions that you conduct through your website, which makes us the primary source to collect and pay taxes on your behalf. If you're looking to control lower tax rates or tax exemptions, we can help. B2C transactions, or B2B, everything will be handled by us.

Merchants who are registered with us can be your ally in case the need for tax audits or inquires occur. If an audit is triggered We intervene to assist with ensuring you remain focused on developing and expanding your SaaS business.

What is the most effective solution to Your Company?

Perhaps this all seems unclear, but the most damaging choice is nothing.

According to Rachel she said "I can never promise that there won't be an audit. The only thing do I can say is that a few steps now will help you prepare for a much brighter future."

For determining what is the best solution for your business, she suggests analyzing the resources available as well as the alternatives.

"It's vital to understand your company's needs, your footprint, global tax laws (duh), and what risks you're willing to accept."

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

Article was posted on here