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

Something I've noticed during my work is that there's a general trend for SaaS and software firms not to pay tax on transactions (sales tax TVA, GST, VAT etc. ).

And I get it.

VAT taxes and sales tax for sales, VAT Taxes and VAT are often confusing and complicated as well as not the subjects that software experts would prefer to devote their time to.

But, it's crucial to realize that neglecting to pay attention to taxation on transactions can result in a risk that goes beyond the payment of tax within the next few years.

Lunch was with Director for Global Tax Rachel Harding who is the most educated person I've ever had the pleasure of meeting on the subject.

She told me about:

• Penalties of 40% and interest Software companies have been charged penalty and interest of 40% because they did not comply with the laws that govern sales tax in states.
• Multi-million dollar valuation adjustments from historical sales tax noncompliance during acquisition due diligence.

Plus much plus.

To answer the question we have asked: no tax evasion could be the ideal solution in 2022.

In this post we'll look at three important factors SaaS companies must be aware of in relation to taxes. The majority of this article is derived from my discussion with Rachel as well as you're capable of streaming the complete audio from our chat in order to listen to all of her opinions.

Three Important Factors SaaS Companies Need to Understand regarding Sales tax

1. Sales Taxes Are Calculated Based upon the location of residence of the buyer and not of the property of the Seller.

Sales taxes are difficult to understand (especially in countries such as that from that of the U.S.), but in general, the most important thing to be aware of is that sales tax is to be paid where the product is used (aka the area the client's location). Taxes do not depend on where your business is located or the place of the headquarters for your business.

In practice, the most important data that is used to establish the source of the sale comes from billing data and the IP address of the computer. Like the title suggests, SaaS is taxed in the same way as items, but is not considered as a product, which is the reason that only 20 of 45 U.S. states have sales tax systems actually tax SaaS. The year 2018 is the one to watch. If you've made enough taxes-deductible sales within a certain zone that are above the threshold, then you'll be legally deemed to have economically cross-border connections (a huge shout-out for South Dakota v. Wayfair to explain this idea! ).

The threshold of sales refers to the number of sales you have within a particular area before having to be taxed. Every tax area (whether it's a nation territorial, state, the national level) has its own way of defining an appropriate threshold.

2. Tax Laws and Regulations have drastically changed in the last 10 years.

Taxes on sales, VAT and other taxes associated with transactions have seen significant change in the past 10 years. Certain changes are more significant than others, which has altered the tax system entirely.

Two major changes that have occurred in the past are:

• The 1st of January in 2015, the EU began requiring software providers to take VAT , and to transfer the tax according to the country of their customer and not to the place of operation for the employees of the company or the headquarters of the business.
• In the year 2018 it was the year in which the U.S. Supreme Court ruled that states have the right to charge sales tax on purchases from sellers who are not in the state (including those selling on the internet) regardless of whether the seller has no presence within the state where they are taxed ( South Dakota v. Wayfair, Inc.). (A.k.a. our reason for deciding to write this article since now nonresidents as well and smaller businesses should be aware of sales tax and the manner in which it is used.)

The question of whether SaaS is tax-deductible, is a topic which has changed in a number of industries too.

Within the U.S., Florida and California are not required to collect sales tax on SaaS subscriptions. However, New York and Pennsylvania do.

Massachusetts didn't require sales tax collection for SaaS. In 2020, , the state will classify SaaS costs as "personal tangible property," that means SaaS subscriptions won't exempt from taxation in the state.

They're not just occurring only in the U.S.

In our chat, Rachel offers several examples of tax-related changes that are applicable to SaaS enterprises across the world.

There's no reason why every SaaS founder or CEO needs to have a degree in taxation. Not even.

It is crucial that you should be educated enough in tax-related preparation so that you can make sure you do correctly and to also find a tax partner who you can trust.

3. If You've Finished It Rightly It's not a need to have anyone else owe you anything.

"If you're doing it correctly technically, then there's not a problem for you." Rachel said.

Tax on sales, also referred to as a consumptive taxIt's a tax that's to the buyer, and not your company. This shouldn't be something that you're spending your money on. It is the responsibility of you to to collect taxes for your customer on their behalf, and to then transfer it to the correct department of government. It's the responsibility of the buyer to pay the tax, but it is the duty of the seller.

"It's when you've done something wrong that you're an expense, and therefore an obligation on your balance sheet. It's possible that you won't charge sales tax until two years after when it's due. The tax is then taken from your wallet."

Four Strategies SaaS Companies Can Manage Sales Taxes as well as VAT

How do SaaS firms calculate all the taxes they must be paying and liable for across the world?

Four ways can we observe SaaS companies use to satisfy the tax obligations associated with transactions:

1. Be aware!

In this post, not paying sales tax is a frequent procedure. But, it can cause your business to be in the midst of many years of tax back along with fees and penalties. The time when this approach may be efficient is diminishing. While online shopping grows as does the desire and the ability to control it.

2. Self-Help

Tax preparation on your own can be a feasible option for large companies that have the ability to manage tax issues efficiently by having an internal team.

It's just not as straightforward to add an automated tax tool to your sales system.

SaaS businesses also have to think about:

• Be sure your data are secure and readily accessible.
• Knowing what is taxable in addition to the taxes to be imposed.
• Tax thresholds to be checked in relation to the time you'll need to pay your taxes as well as file tax return.
• Making sure you pay the right amount and promptly making tax returns to the tax offices are required to. This could be done monthly or quarterly, or even every year.
• Stay up-to-date on the most recent tax law and tax rules.
• Answering inquiries and notices by Tax officials. It appears that they are phishing or can the issue be addressed?

It could be an issue for a company who lacks the necessary technical expertise and may lead to resentment and an increase in turnover.

3. Make use of an accounting firm

If you choose to lease out the tax obligation, this implies that you don't have internal resources available and therefore is likely to cost you more. Contrary to a custom approach, using the service of an accounting firm typically means they'll take an approach that is compliant to the highest degree regardless of whether you're searching for a strategy which is more specific.

This is the view only an in-house tax expert is able to provide, which includes comprehending the strategy of the business along with tax law as well as the ways they're connected.

4. Utilize a Merchant of Record (MoR) as well as outsource liability

We are the merchant authorized for every transaction you conduct on your site. That means that we're accountable for collecting taxes as well as pay tax on behalf of you. There's no need to worry about finding tax rates and custom taxes Tax exempt transactions B2C, B2B and the entire process is managed by.

The record-keeping merchant is there to assist you if any tax audits or inquiries are made. In the event of audits, we intervene and help you ensure that you stay determined to grow and develop your SaaS firm.

What is the most effective solution for your company?

There's a chance that this has been over the top, but the best choice is to not do any actions.

The method Rachel said, "I can never promise that you will never be subject to an audit. The only thing I say? What I guarantee is that a few actions now can give you an opportunity to live an even brighter and more positive prospects in the future."

For determining which one is the best option for your organization, she recommends reviewing all available resources and alternatives.

"It's really knowing the type of firm you're managing, the size of your company, the tax laws (duh) in addition to the risks you're willing accept."

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

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