Are SaaS Companies Ignore Sales Taxes and VAT in 2022? -
One of the things I've learned while working at is how common it is for SaaS as well as software firms to disregard transaction-related tax (sales taxes such as VAT, GST, and so on. ).
And I get it.
VAT, sales taxes, and GST are complicated, confusing and not something IT leaders would like to invest their time.
But also, you should be aware that not paying taxes related to transactions has risks well beyond paying the tax back at some time in the near future.
I had lunch with Global Tax Director Rachel Harding, the most knowledgeable person that I have met regarding this issue.
She shared with me:
- 40% interest and penalties she's seen software companies accrue when they've ignored state sales tax requirements.
- Multi-million dollar valuation adjustments from historical sales tax noncompliance during acquisition due diligence.
Plus much and more.
In answer to the question we asked ourselves: No tax evasion is not a good idea for 2022.
In this piece in this piece, we discuss three aspects SaaS businesses must know regarding taxes. The majority of the content is derived from my discussion with Rachel as well as you may also stream the full video of our conversation for those who want to listen to every word she has to say.
3 Important Things SaaS Companies Need to Understand about Sales Taxes
1. Sales Taxes are Calculated Based on the location of the Buyer, not the location of the seller.
Sales taxes are complicated (especially in places like the U.S.), but generally speaking, what's important to remember is that sales tax is paid where the item is consumed (aka the location where your client is). It's not determined based on the location of your business, or the location of your company's headquarters.
The most important data to source sales is the billing and computer IP address. The name suggests that SaaS is taxed in the same way as services and not goods, meaning only 20 of the 45 U.S. states with sales tax laws are actually taxing SaaS. In 2018if there are enough taxable sales in a zone that exceeds the threshold, you will be considered to be in economic cross-border nexus (a special shoutout to South Dakota v. Wayfair for this concept! ).
A threshold for sales is the amount of sales within a certain area before having to submit taxes. Each tax zone (whether it's on a territorial, state or country level) offers its own method of setting a threshold.
2. The Tax Laws and Regulations have dramatically changed over the past 10 Years
Taxes on sales, VAT as well as other taxes related to transactions have seen a significant change during the last 10 years. Some changes are more important than others and have changed the entire landscape.
Two historic changes are:
- Since January 1st, 2015 on the 1st of January, 2015, the EU started requiring software vendors to collect and pay VAT in accordance with the place of the buyer rather than the address of the seller's company or employees.
- In the year 2018, the U.S. Supreme Court ruled that states can impose sales tax on purchases through sellers located outside the state (including online sellers), even if the seller is not located in any physical presence within the taxing state ( South Dakota v. Wayfair, Inc.). (A.k.a. why we wrote this post is because now, nonresidents and businesses of all sizes must understand sales tax and the way it is applied.)
The question of whether SaaS is tax-deductible is a subject that has been re-defined in several areas as well.
In the U.S., Florida and California do not require the collection of sales taxes on SaaS subscriptions. But New York and Pennsylvania do.
Massachusetts didn't require sales tax collection for SaaS. But in 2020, the state changed its classification of SaaS charges to "personal tangible property," that means SaaS subscriptions now are in the tax bracket of sales taxes within the state.
And these changes aren't just happening across the U.S.
In our conversation, Rachel offers several examples of the way in which taxes are evolving for SaaS companies around the world.
There's no reason that each SaaS chief executive or founder needs to be a tax expert not at all.
The point is that you should be educated enough to care about doing it right and finding an accountant with whom you are able to count on.
3. If You've done it right There's no reason to owe anything More
"If you're doing things right, technically, it's net-zero for you," Rachel explained.
Tax on sales is a consumption tax -- it's a tax on the consumer, not on your business. It shouldn't be something you're having to pay out of pocket. However, it's the responsibility of you to to collect sales tax on the buyer's behalf, and remit it to the right government agency. This is a buyer's responsibility, but a seller's obligation.
"It's the moment you're doing it incorrectly that it's a cause for expense and liability on your balance report. It's possible, but you're not likely be able to charge a sales tax for two years after the tax was due. Therefore, it's completely from your pocket."
4 Strategies SaaS Companies Can Manage Sales Taxes and VAT
So how do SaaS firms determine the taxes they must pay and withhold around the world?
There are four ways we observe SaaS businesses employ to meet their tax obligations related to transactions:
1. Ignore It
We've discussed in this article, ignoring sales taxes is a very popular practice -- but it can make your business liable for many years of tax back, fees, and penalties. The period in which this method could be effective is waning. While online shopping continues to increase, so too does the drive and ability to control it.
2. Do It Themselves
Making your taxes yourself is a good option for larger companies with the capacity to do it effectively with an in-house team.
But it's not as easy as plugging the tax software of your choice into your sales platform.
SaaS companies also need to consider:
- Ensure that your information is clean and accessible.
- Understanding what's taxable and the rate to pay.
- Monitoring tax thresholds to know where you'll need to remit taxes and file tax return.
- Remitting the correct amounts and timely filing of returns to all tax-related jurisdictions in which you are required to. This could be either quarterly or monthly. annually.
- Be aware of the latest tax law and rules.
- Responding to inquiries and notices from the tax authorities. Are they phishing, or are they a legal matter?
This could be difficult for finance departments that do not have the technical know-how and can lead to resentment and increased turnover.
3. Find an Accounting Firm to hire
When you decide to outsource your tax obligations as a result, you'll have less internal resources required and it's likely to cost more. Instead of a custom strategy, employing an accounting company usually implies they'll adopt a cautious approach with maximum compliance regardless of whether you would prefer an approach that is more tailored.
It's an insight that only an in-house tax expert could provide -- one that requires understanding the business, its strategies, tax laws, and how they intersect.
4. Use a 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 and remitting taxes on your behalf. It doesn't matter if you're looking for lower tax rates, custom taxation, tax-exempt transactions, B2C or B2B -- everything will be handled by.
A merchant of record is also at your side if there are tax audits or questions that are raised. If an audit happens We intervene to take the lead to ensure that you stay focused on building and growing your SaaS company.
What's the best solution for Your Company?
It's possible that this all seems too confusing, but the most damaging choice is not to take action.
As Rachel said, "I can never promise that you will or won't be audited. But what I can assure you is that small steps now could help you prepare for a much brighter future."
In order to determine what is the best option for your business it is recommended to evaluate the available resources and options.
"It's essential to know your company's needs you operate, the footprint of your business, tax law (duh) and the risks you're willing be willing to take."
