Understanding SaaS Sales Tax

It is already daunting to steer your company through the whirlwind of sales tax. But when it comes to Software-as-a-Service (SaaS) businesses, this statement stands even truer. So why is SaaS sales tax so challenging? The reason is, there doesn’t exist any single standardized system internationally to preside over SaaS sales tax. Every region has its own taxation rules.

The SaaS businesses have to navigate through the world of tax compliance themselves. Of course no one wants tax penalties coming their way!

In this guide, we will walk you through the factors that impact SaaS sales tax, what you need to consider when selling internationally, and how SubscriptionFlow helps you tackle taxes like a pro.

Let’s begin from the basics.

What is Sales Tax?

When a company sells products in a certain region, it gets subjected to the sales tax according to the tax regulations of that region. Sales tax is a percentage of the sale price, and is usually collected from the customer at the point of sale. The collected amount is then delivered to the governing body in that area. The area’s jurisdiction determines the amount of the tax collectable.

What is SaaS Sales Tax? Is SaaS taxable?

SaaS sales tax is a consumption tax applicable to the SaaS products or services. Sales tax on SaaS differs from the sales tax on physical products. The tax is not only based on the area where the business has a physical presence. It is also impacted by where the business’s customer base is. SaaS products are being taxed in over 40 countries in the world today. In the US alone, 25 states apply sales tax to SaaS services. 7 additional states apply tax if the SaaS service is downloadable as a software.

Every country or state has its own jurisdictions regarding SaaS sales tax. Since the SaaS industry is sky rocketing today, SaaS products and services are getting taxable in more and more countries. SaaS businesses are increasingly cloud based, which means that their services can be accessed from all over the globe. Geographical restrictions are no longer a concern when it comes to the growing number of customers. However, for a software company who wishes to extend its services to a certain region, it is important to understand the tax regulations there first.

Why is SaaS Sales Tax Complicated?

With the evolution of SaaS, the challenges regarding the SaaS sales tax have also evolved. One point of frustration for the businesses is that every country has its own definition for ‘SaaS products’. Hence, its own laws regarding taxing. To add to this frustration, the SaaS sales tax laws are prone to constant change. These factors make it increasingly dispiriting for SaaS businesses to manage tax compliance.

In the US alone, the tax regulations vary according to the concerned state. There are some states who consider SaaS as a service, and some who consider it a product. States like Hawaii consider the services taxable and hence require SaaS sales tax. In some other states, SaaS is regarded as a tangible software, and deemed taxable, such as in Washington. SaaS businesses need to understand the ways their services are taxable to achieve compliance in multiple regions.

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Fundamental Factors Affecting SaaS Sales Tax

Jurisdiction

Some countries or states deem SaaS services taxable, while others do not. That is because the jurisdictions in these areas, and their definitions of a SaaS service differ. For instance, the New York state considers SaaS taxable, while California does not.

Nexus Requirements

Nexus means an adequate physical presence of a company in a specific region which makes it liable for tax compliance. If software sales companies have nexuses in different states, they may be subjected to the software sales tax regulations there. However, since the SaaS businesses now are more cloud-based than geography-based, this definition of nexus is becoming outdated.

Economic nexus has become more relevant, as it refers to a SaaS company’s economic activity in a region, rather than its physical presence. Each state has its own economic nexus requirements. A company is considered taxable if it crosses the determined sales threshold in a state. Of course a larger customer base in an area would mean higher economic activity in that area. This would mean an increased likelihood of a company getting subjected to SaaS sales tax in that area.

Other than that, countries may also impose taxes such as VAT and GST according to where your customers are located.

Nature of the SaaS Service

The sales tax regulations differ for SaaS services for business purposes, and SaaS services for personal use. The way a SaaS service is accessed can also determine whether it is taxable or not. For instance, in some regions SaaS sales tax is applicable if the service is delivered through a software which can be downloaded. If it is only delivered through cloud, then it might not be liable for tax.

Dynamic Tax Laws

Tax regulations are prone to changes with the passage of time. The SaaS businesses must keep themselves updated to stay on top of the compliance game. The collection and remittance of tax to the authorities must be accurate in order to prevent financial penalties.

International Considerations

If your SaaS business has significant economic activity throughout the globe, you may be subject to international tax regulations. For example, GST (Goods and Services Tax) or VAT (Value Added Tax). These taxes can occur in addition to SaaS sales tax requirements.

SaaS Sales Tax Considerations for International Businesses

As we discussed till now, there is no single solution for getting SaaS sales tax compliant. Different sales tax jurisdictions exist in different countries, and in the case of the US, within the same country.

It is important for companies to understand these complexities, if they want their business to flourish. Without the looming risk of tax penalties.

Here are some useful SaaS sales tax factors to be considered if you want to grow your business across borders:

1. Taxable products

You need to understand which services or products you offer are taxable in which countries. And which of them are exempted from taxation.

2. B2B or B2C?

SaaS sales tax is affected by the nature of your business. Whether you sell B2B (business to business), or B2C (business to customer) makes a difference. B2C is more likely to be taxable across the world as compared to B2B. B2B software is in the process of getting increasingly taxable as well. Tax authorities within the US are including it in their list of taxable goods.

The digital goods and services provided to the business customers might be taxable. However, the definition of ‘business customers’ varies in different jurisdictions. For instance, some countries consider only those customers as businesses which are VAT-registered. If not, then from the tax authority’s point of view, those entities would be considered your company’s direct consumers, rather than businesses.

3. Economic Nexus

When your business has an economic nexus in a region, the specific tax laws there come into play. They adhere to the threshold of the nexus, and the tax rate that will become applicable.

A nexus threshold means the amount of sales your company needs to be making to be considered an entity eligible for paying the SaaS sales tax. And the amount of taxes you will be paying is determined by the tax rate in that region.

4. Audits

Auditing means the documentation and reporting of your tax related finances. You need to present the accurate evidence of your taxable/non-taxable sales, tax payment receipts or tax audits.

It is important for you to retain your tax records for the time specified by the tax jurisdiction. So that you are ready for any future audits coming your way. Having a high business profile means inviting more frequent audits. Having an accurate SaaS sales tax record is significant for proactive compliance.

5. Filing and Remittance

You need to see how often you are required to file your sales tax. It could be monthly, quarterly, annually etc. And check which payment method you employ for remitting the taxes. The currency that you pay your sales tax in also matters a lot.

Tax Penalties

You need to be aware of the tax penalties in the regions you operate in. According to some jurisdictions, in case of unpaid software-as-a-service sales tax, it needs to be paid back with added interest. Other authorities might charge an additional fee for non-compliance. Moreover, your business might as well be subjected to criminal charges in worse case scenarios.

Streamline SaaS Sales Tax Management with SubscriptionFlow

It is challenging to navigate through SaaS sales tax without running into bottlenecks. With the ever-changing, and diverse tax regulations, it becomes difficult to manage tax complexities in-house. The need to have a tax-expert software is compelling.

SubscriptionFlow integrates with Avalara, a specialized tax software, to seamlessly manage your SaaS business’s compliance. Via Avalara, you can efficiently manage SaaS sales tax calculations, exemptions, returns, and tax documentation. SubscriptionFlow makes sure that you master sales tax compliance.

Automated: Avalara with SubscriptionFlow automates the crucial steps of SaaS sales tax compliance. It includes tax calculation according to each region’s jurisdiction, tax filing, exemption management, tax certification and more.

Cost-Saver: Since Avalara runs your tax procedures on automation, it saves you the high costs associated with manual tax management and eliminates manual errors.

Scalable: Our platform’s tax software integration facilitates the processing of millions of invoices, providing you with real-time SaaS sales tax calculations.

Easy to Control: Avalara with SubscriptionFlow is easy to use and navigate. You are empowered to oversee your tax management and make adjustments as needed. Apply tax exemption to customers and refund transactions when necessary.

Easy to Integrate: SubscriptionFlow allows you to integrate Avalara with external accounting, invoicing and payment processing platforms in your use. You can have all your data consolidated into one system and manage tax operations from a single window.

Book a demo with SubscriptionFlow to enable proactive compliance to SaaS sales tax regulations. Automate complex tax management, and focus on expanding your business across the globe worry-free.

Conclusion

SaaS sales tax is a consumption tax applicable to the SaaS products or services. Some fundamental factors affecting SaaS sales tax are regional jurisdictions, economic nexus considerations, dynamic tax laws, and the nature of your SaaS offering. For growing internationally, your SaaS business needs to be equipped with powerful tax management tools, so that you prosper without setbacks in the form of financial penalties. Leverage Avalara with SubscriptionFlow to stay on top of the tax compliance game.