Can SaaS Companies Ignore Sales Taxes and VAT in 2022? -

One thing I've discovered while working is that it's common for SaaS and software businesses not to pay tax on transactions (sales taxes tax, VAT, GST and so on. ).

And I get it.

VAT, sales tax, GST, and VAT are complicated, unclear, and certainly not where IT professionals would prefer to invest their time.

But also, you should be aware that failing to pay taxes associated with transactions could result in a situation which goes far beyond the paying of some back taxes sometime in the near future.

I had a conversation with Global Tax Director Rachel Harding, the most knowledgeable person I am aware of on this issue.

I asked her:

• Interest and penalty of 40% The software industry has been hit with 40% of interest and penalties for not submitting to taxes on sales in the state.
• Multi-million dollar valuation adjustments from historical sales tax noncompliance during acquisition due diligence.

More and more.

As a response to this question we asked ourselves: Yes You shouldn't forgo taxes until 2022.

In this this article, we will examine three areas SaaS businesses need to be aware of when it comes to taxation. A majority of this content was derived from a chat with Rachel which you can view the entire audio of our chat for a listen to the full range of her opinions.

Three things SaaS Companies Need to Understand In relation to Sales Taxes

1. Sales Taxes are calculated on the place of purchase of the buyer Not the Seller.

Sales taxes are complicated (especially those in those that are in the U.S.), but generally, what you need to understand is that sales tax is payable where the item is being consumed (aka the location in which your client is). Taxes don't depend on where you are or where you have your corporate headquarters.

The most relevant data used to determine the source of sales is the bill and the computer's IP address. It is a logical assumption it is SaaS is taxed in the exact same as other services but not goods and therefore only 20 of 45 U.S. states with sales tax laws actually taxing SaaS. If you are able to prove that you've made enough revenue in the region which exceeds the specified threshold and you are deemed to have economic connection (a special shoutout for South Dakota v. Wayfair to explain this idea! ).

A threshold for sales is the number of sales in a specific area prior to needing to pay taxes. Every tax area (whether it's on a state, territory or country scale) offers its own method to determine the threshold.

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

Sales taxes, VAT along with other taxes related to transactions have changed a lot during the last 10 years. Certain tax changes are more crucial than others and have changed the tax landscape completely.

Two major changes in history are:

• 1 January 2015 The EU began the process of requiring software vendors to take VAT, and then remit it based on the location of the buyer rather than the place of operation for the business or the employees.
• In the year 2018, In the year 2018, U.S. Supreme Court ruled that states can charge sales tax on purchases made through sellers located outside their state (including on-line sellers) regardless whether or not the seller does have a physical presence in the state that taxes it ( South Dakota v. Wayfair, Inc.). (A.k.a. that's the principal reason we wrote this article is that, at present all small and non-resident businesses as well as the unemployed must be aware of sales tax and the way it is applied.)

If SaaS can be tax-deductible, it is an issue that has been re-defined in several sectors as well.

In the U.S., Florida and California don't require tax collection on sales taxes on SaaS subscriptions. However, New York and Pennsylvania do.

Massachusetts didn't require sales tax collection for SaaS. But, in 2020, the state will reclassify SaaS charges to "personal tangible properties" meaning SaaS subscriptions will fall into the sales tax bracket. taxes within the state.

They're not just being experienced across the U.S.

In the interview, Rachel offers several examples of the way in which taxes are evolving for SaaS businesses around the globe.

There's absolutely no reason to believe that every SaaS CEO or founder needs to have a degree in taxation not at all.

It's important to note that you must be aware the basics of tax preparation in order to ensure that you're doing tax preparation in the correct way, and to find an IRS partnership you are able to be confident in.

3. If You've Followed the Correct Procedure If You've Done It Correctly, There's No Need to Pay Anything Extra

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

Tax on sales is a consumption tax -- a tax on the customer rather than your corporation. You shouldn't end up paying out of the pocket. It's up to you to to collect taxes on the buyer's behalf, and to pay it back to the correct public authority. The buyer is responsible as well as a seller's obligation.

"It's the moment you're doing it wrong that it becomes an expense , or a liability in your balance sheet. In the event that there's no mistake, you're not likely to have the ability to charge sales tax for two years from the time the tax due. Then it's from your pocket."

The Four Ways SaaS Companies Can Manage Sales Taxes and VAT

How then can SaaS businesses determine all tax obligations they must collect and pay around the globe?

Four approaches we see SaaS businesses employ to meet the tax requirements associated with transactions:

1. Do not ignore It

In this article, ignoring sales tax is an extremely well-known practice, however it could leave your business with decades of unpaid taxes or penalties and fees. The times during the time this strategy will be effective are waning. As online commerce continues to expand, so does the drive and capability to regulate it.

2. Self-Help

Tax preparation by yourself is a good option in larger businesses that have the resources to manage it effectively with an in-house staff.

It's however not as simple as plugging an automatic tax tool in the sales program you use.

SaaS enterprises also have to be thinking about:

• Make sure that your data are safe and easy to access.
• Understanding what tax-deductible in addition to the taxes that will be assessed.
• Be aware of tax thresholds to know the deadlines to pay taxes, and also file your tax return.
• Make sure that you make the correct payment and file your tax returns in time with all tax authorities that you have to. It could be every quarter or. annually.
• Staying informed about changes in tax laws and regulations.
• Responding to notices and inquiries by the tax officials. Do they appear to be phishing or is it actionable?

This can be challenging for finance departments who don't have the technical know-how which can lead to resentment and increased turnover.

3. Locate an accounting firm to engage

If you outsource the tax preparation process, it implies that you have fewer resources needed, but it's going to increase the cost. Instead of a custom procedure, using an accounting firm typically means that they'll use a cautious approach, which is in compliance with the strictest standards regardless of whether you'd like an approach that is specific to your needs.

The viewpoint is one that only an expert in-house is able to provide and is based on understanding the business strategies, the tax regulations as well as the manner that they intersect.

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

As a company, we are the primary merchant on each transaction you make on your site and we are accountable for collecting taxes and paying them on behalf of you. It doesn't matter if you're seeking a lower tax rates, custom taxes, tax-exempt transactions B2C and B2B- it all is handled for you.

Merchants of record will be there for you if you have tax audits or issues raised. When an audit occurs We intervene to help you and let you remain concentrated on expanding and building your SaaS company.

What's the ideal solution for your business?

Maybe this sounds overwhelming but the worst choice is to do nothing.

According to Rachel who said "I cannot guarantee that there won't be an audit. The only thing I do assure you is that the smallest actions taken now will give you the best chance for much brighter future."

In order to determine what is the best option for your business it is recommended to look at all the options and resources available.

"It's all about understanding your business, your footprint, your global tax laws (duh) and the risk you're willing risk."

Nathan Collier Nathan Collier is the Director of Content as well as Community for .

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