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

What I've discovered while working at is how prevalent it is to SaaS and software companies to ignore tax related to transactions (sales taxes, such as GST, VAT, etc. ).

And I get it.

VAT, sales tax, and GST can be confusing, difficult, and certainly not how software leaders want to spend their time doing.

But also, you should be aware that delay in tax-related transactions can lead to risks well beyond paying certain back taxes at some time in the near future.

I had a chat with the Global Director of Tax Rachel Harding, the most knowledgeable person I know about this topic.

I asked her:

• 40% penalty and interest Software companies have been charged 40% interest as well as penalties for not paying taxes on sales in the state.
• Multi-million dollar valuation adjustments from historical sales tax noncompliance during acquisition due diligence.

and many and plus.

To answer our own question: No it isn't an excellent idea to ignore tax obligations up to 2022.

In this piece in this article, we discuss three issues SaaS companies must be aware of about taxes. Most of the information comes from my conversation with Rachel in addition to you may also stream the complete video of our conversation in case you'd like to know the full range of her thoughts.

Three Facts SaaS Companies Need to Understand about Sales Taxes

1. Sales Taxes are Calculated Based on the Location of the Buyer, Not the address of the seller.

Sales tax is a complicated issue (especially the ones that are located in the U.S.), but generally, what you need be aware of is that sales tax will be considered based on when the product is consumed (aka the place in which your client is). The tax is not based on the location of your business or where you have your company's headquarters.

The most meaningful data for sourcing sales is billing information as well as the location of the computer. The name suggests that SaaS is taxed the same manner as goods, but not services which means that only 20 out of 45 U.S. states that are equipped with sales tax systems are taxing SaaS. Since the year If you have taxable sales in a zone that are above the threshold, it will be deemed to be in an economic cross-border relationship (a particular shout-out to South Dakota v. Wayfair for this concept! ).

A sales threshold can be defined as the number of sales in the boundaries of a specific area prior to having to file taxes. Every tax-paying zone (whether it's a territory, state, territory or even a national scale) is unique in setting an amount of threshold.

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

Taxes on sales, VAT, as well as other taxes that are related to transactions have seen significant changes in the past 10 years. Certain changes are more important than others, and they have impacted the entire tax system.

Two important changes that occurred over the years include:

• 1 January 2015 The EU started requiring software vendors to collect VAT and to remit it based on the location of the buyer -- not the location of their employees or the headquarters of the company.
• In the year 2018, which was in 2018, in the year 2018, U.S. Supreme Court ruled that states can assess sales taxes on purchases made by sellers outside of the state (including those selling online) regardless of whether the seller is not located in a physical presence in the state where taxation is imposed ( South Dakota v. Wayfair, Inc.). (A.k.a. The reason for writing this article since now nonresidents as well as small-sized businesses are required to be informed about sales tax, and how it's applied.)

The question of whether SaaS can be tax deductible or not has been a subject of debate in many sectors as well.

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

Massachusetts didn't require sales tax collection for SaaS. In 2020, however, the state will classify SaaS charges as "personal tangible property," that means SaaS subscriptions will be in the sales tax bracket. taxes in the state.

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

In this interview, Rachel offers several examples of tax-related changes that are applicable to SaaS companies around the globe.

There's no reason that every SaaS CEO or founder needs to have a degree in taxation -- far from it.

Important to note that you should be educated enough to know how to go about taking it in the proper way and to find an accountant with whom you are able to trust.

3. If You're Doing It Right If You're Doing it Right There is no need to Pay Anything Additional

"If you're doing it correctly technically, the net zero shouldn't be a problem for you," Rachel explained.

Sales tax is a consumption tax, a cost borne by the customer, not your business. It is not something you should pay for it. It is the responsibility of you to take care of taxes on the buyers behalf, then to pay it back to the appropriate public authority. It is the buyer's responsibility as well as the seller's.

"It's that when you're performing things incorrectly that they can become a cause for expense , and even a liability on your balance sheet. In the event you do not, it's unlikely to assess sales tax for two years following the time when tax was due. So then it's all out of pocket."

4. Strategies SaaS Companies Can Manage Sales Taxes and VAT

What are the methods used by SaaS firms calculate taxes they must be withheld and pay all over the world?

We can identify four strategies we have observed SaaS companies employing to satisfy the tax obligations related to transactional taxes.

1. Do not pay attention

This article explains why the idea of not paying sales tax is an extremely common practice, but one that will leave you with years of tax debt or penalties and fees. The time when this method could be successful is decreasing. While online shopping grows and so do the motivation as well as the capability to regulate it.

2. Self-Help

Doing taxes on your own is an option that works well for larger companies with the ability to manage it effectively with an in-house team.

There's no such thing as plugging tax software of your choice to your sales software.

SaaS companies also need to take into account:

• Check that your data is clean and accessible.
• Knowing what is taxable as well as the charges to be charged.
• Checking tax thresholds for the time to determine the deadline to file taxes and pay taxes.
• Making sure you make the correct payment as well as timely filing taxes to the taxing jurisdictions to where you are required to file. It can be quarterly or monthly. annually.
• Be aware of changing tax laws and regulations.
• Responding to notices and inquiries from tax authorities. Are you committing phishing or can it be taken action?

It could be an issue for finance teams that don't have the necessary knowledge about technology and may cause discontent as well as increase in turnover.

3. Choose an Accounting Firm that you can employ

When you outsource your taxes as a result, you'll be able to use fewer resources internally needed, but it's going to cost more. Instead of a custom approach, using the services of an accounting firm typically implies the company will take a more conservative method that is compliant to the highest degreehowever, you'd like to take a more customized approach.

It's an insight only an insider expert is able to provide, one that requires an understanding of the company's taxes, tax policies, and the ways in which they intersect.

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

We are the official merchant of the transactions you conduct through your website, which means that we're accountable for collecting and remitting taxes to you. If you're interested in lower tax rates, custom taxation, tax-exempt transactions, B2C or B2B- everything is handled for you.

The record-keeping merchant is also at your side if any tax audits or inquiries are made. If an audit happens then we will step in to take over the responsibility and allow you to work on building and growing your SaaS company.

What's the ideal solution for your business?

It's possible that this is way too high, but the best option is not to choose anything.

Like Rachel said, "I can never promise that you'll never get an audit. But what I can assure you is that small , small changes right now will help prepare for better opportunities in the future."

For determining what's the most effective for your company it is recommended to look at the resources available and the alternatives.

"It's essential to know the needs of your business, your footprint, global tax regulations (duh), and what risks you're willing be willing to accept."

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

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