The SaaS industry’s rapid growth shows no sign of slowing down ( research predicts it will continue to grow by 21.2% a year until 2023) . As a result, over 40 countries have re-evaluated the tax regulations for the sale of digital goods, software, and SaaS, with even more looking to follow suit in the near future.
But what does that actually mean for SaaS businesses? Where do you have to charge tax and what happens if you get it wrong?
We sat down with our CFO and resident Tax Expert, Hugo Grimston, to find out.
Do I have to charge my customers sales tax?
“Yes, the obligation to charge tax is on the seller of the software. And if you fail to do it, ignorance is no excuse and the tax authorities will come after you for interest and potentially other penalties.”
I don’t have an office there, do I still have to register for sales tax?
“Software is taxed in a very different way to e-commerce or physical goods. The important thing is where your customer is based.
“The big change now is that in the US there is the concept of economic nexus as opposed to physical nexus. This means that if you make an amount of sales into a US state then you are theoretically liable for tax.”
My company is still small, does sales tax apply to me?
“In certain instances and certain countries, maybe not. However, there are countries in the world which have no threshold so effectively from the first dollar you sell into that country you have to register for tax, such as Russia and South Korea.
“Also, a lot of jurisdictions have very low thresholds which mean you have to register when you make a certain value of sales. In the EU, for example, it’s €10,000 across the EU before you have to start charging tax. In the US it’s a number of transactions per state and it’s only about 200 in most states. So generally, you don’t have to be that big to be caught by the tax authorities.“
What are the penalties for non-compliance?
“The penalties for non-compliance are payment of back taxes, interest on those payments, and potentially additional penalties if you have done it maliciously.
“That sounds like it isn’t such an issue but if you have been non-compliant for a number of years, the bills can be massive and it’s very unlikely that you’ll be able to reclaim that tax from the customer.”
My company is already registered in multiple jurisdictions do I really have to list additional places?
“Yes. The fact that you are registered in any jurisdiction doesn’t exempt you from being registered in another jurisdiction. No tax authority is going to give you credit for paying tax somewhere else because that doesn’t mean money in their pocket.”
Do I still have to pay sales tax in my state when selling with a reseller?
“Generally, not. When you sell via a reseller the obligation to be registered, calculate the correct amount of tax and make filings lies with the reseller. The supply from you to the reseller is generally free of tax. If the reseller is compliant or not compliant with any jurisdiction, you shouldn’t really care because you have no tax obligation anyway. So, that’s their problem basically.”
I am selling B2B, does this apply to me?
“B2C sales tax is more prevalent than B2B, however, there are some jurisdictions that don’t distinguish between B2C and B2B – the US being a big and prominent example. Similarly, for sales within Europe to be B2B, they need to be VAT registered, that doesn’t necessarily mean that they are just business customers. Therefore, you may have sales tax obligations to people you think are businesses but from a VAT perspective they are seen as consumers.”
Can I manage sales tax myself?
“You could definitely do this yourself but it is incredibly complex and time consuming. So, very briefly, you’d need to register for sales tax in a bunch of jurisdictions, you’d need to make sure your checkout is calculating the correct amount that needs to be charged to each customer and keeping up to date with new tax rates, you then need to file, submit and pay in different jurisdictions – all of which is really painful. Or you can use a Merchant of Record, no compliance, no liabilities, no hassle and super easy.”
The ultimate SaaS guide to sales tax and selling internationally
Read the guide to find out what sales tax on software means for businesses like yours.