21 Mar 2019  |  Operations

This Silent US Sales Tax on Software will Leave 77% of Companies Caught Out

3 minute read

We’ve recently been looking at the US sales tax charges. Now, we’re examining how prepared software businesses are for the shift by looking at the overall awareness and how many of our sellers will be affected when selling to the US.

When we heard about the recent US sales tax changes, we analyzed our customer base and found that 47% of sellers will be affected due to certain thresholds being crossed when selling into the US. So, to ensure that everyone is ready and caught up on what’s been happening, here’s our quick summary of the essential information you need to know about the US sales tax changes.

The move to economic nexus

The new change to US sales tax termed ‘economic nexus’ means that in certain states, sales tax now has to be collected based on the state location of the customer. Economic nexus is an update of the old system in which businesses were only charged sales tax if it had a physical presence, like an office, warehouse or permanent employee in the state. This will affect software businesses around the world - not just those inside the US - if they’re selling to customers in states that have adopted or will adopt economic nexus laws.

This means businesses will now have to check their eligibility for collecting sales tax across the states, plus managing the reporting and remittance of tax collections, and ensuring they charge the right amounts and provide the correct documentation when charging tax too.

What states are adopting these changes?

Thirty-two states have now adopted economic nexus, with more about to make the jump. These states include some of the US biggest cities and most populous states like New York, Chicago, Washington, Texas, and more. Eligibility thresholds - the level at which a business must start paying tax - vary from state to state and can be based on annual revenue, number of transactions per year, or both.

(Pennsylvania will be added from July 1st, 2019)

What prompted these changes?

The rise of e-commerce led to states realizing a significant amount of tax receipts were being missed out through large online companies that don’t need a physical presence in their state. Online retailers, like Amazon, Facebook and Google have seen revenues skyrocket while physical retail sales haven’t slowed down, and states hope this will redress the balance.

Who’s affected by this change?

Economic nexus will affect almost every business, including:

  • Those outside the US selling to customers located in states where economic nexus is in place.
  • Both B2B and B2C transactions.
  • Digital goods, software, and SaaS products - even where no physical ownership is involved.

We’ve also investigated how aware software businesses are of economic nexus with a survey, sent out to non-Paddle software businesses. Our survey found that 77.2% of people in the UK software industry didn’t know of economic nexus.

 
 

From the 23% of businesses who said they knew about the new tax rules, 90% admitted that they either don’t know of or do not have a plan in place to become compliant.

 
 

This is quite worrying, given the real impact that economic nexus will have for software business selling both inside and outside the US. Many businesses using disparate billing stacks will need to urgently undertake research of each state’s implementation of economic nexus, implement a way to charge, report and remit taxes, and keep up-to-date with changes in legislation.

What does this mean for businesses selling into the US through Paddle?

Software businesses using Paddle have complete peace of mind: no need to hire extra people or become overnight tax experts. You can continue to run and grow your business without the headaches that tax liabilities compliance create, as well as other issues.

Unlike other billing or tax solutions, Paddle operates as a Merchant of Record (MoR), becoming legally responsible for sales – including tax – providing everything you need to sell software: payments, currencies, subscription management, financial and privacy compliance, invoicing, and more.

With Paddle, you can scale software sales with one unified platform, and relax in the knowledge that you no longer have to manage tax compliance. Find out more about what MoR means in our recent blog post.