While SaaS market growth is snowballing, many early-stage business owners need help handling SaaS sales tax. Planning and timely payment of taxes and other regulatory topics are core aspects of prudent financial management and reporting.
Sales tax is a consumption tax paid by the buyer (typically through the seller) to the tax authority, like the IRS, for selling specific products and services.
Whether or not SaaS is subject to sales tax depends on your jurisdiction. Different states and countries may have other laws, and you’ll need to be up to date with your local regulations to handle them well.
With the right accounting partner and technological tools, collection, reporting, and planning of SaaS sales tax doesn’t have to be a headache.
Is SaaS Taxable?
The SaaS market is projected to grow 21.2% annually through 2023. While technological advances like cloud computing have brought opportunities for businesses to sell digital products like software as a service, they have also added tax complexities.
Different countries may view SaaS operations differently depending on the location of your business and your clients. It’s taxable in some and not in others. To avoid tax infractions, firms selling SaaS products and services must understand sales tax laws applicable where they are doing business.
You typically won’t pay SaaS sales tax in jurisdictions where services aren’t taxed, like Wisconsin, Vermont, Virginia, and Wyoming. However, places like Washington, South Carolina, South Dakota, and the European Union consider SaaS a taxable service or digital good, meaning you have to pay SaaS sales tax. These jurisdictions have more detailed rules on the taxation of SaaS.
The confusion around software taxation arises from SaaS needing to be clearly defined as a digital product or tangible good in most states. With taxation regulations changing regularly, businesses must stay on top of tax laws in areas they operate in or sell their services to ensure they are compliant.
Tax Threshold
Businesses should explore whether what they sell is SaaS and what taxation regulations apply in their jurisdiction. In the US, sales tax is governed at the state level, with each state having unique taxation rules.
In the US, the economic nexus principle is used for SaaS sales taxes and requires firms to collect sales taxes in the states they’re selling in, and you need a valid sales tax permit to collect sales tax. Your accountant can help you register for the license online or by snail mail.
Sales tax liability depends on sales volumes, the business location, and your selling methods. Businesses eclipsing the set tax registration threshold within the tax period must register for local taxes. For example, companies surpassing A$75,000 must register in Australia, while firms in the EU and India must register after one SaaS sale.
The threshold for SaaS sales tax in the US is usually $100,000. Some states have other thresholds, like the number of transactions. For example, 200 separate transactions per year is a common threshold.
Calculating Sales Tax in the US
You’ll need to know your sales tax obligations if you’re selling software as a service in the United States.
To accurately calculate your sales tax liability in the US, you must know the location of the buyer and apply the proper state rate to the transaction. Fortunately, several tools and professionals can help you calculate sales tax in the US.
Tips for Collecting SaaS Sales Tax
Collecting sales tax on digital products can be daunting. With the long and complicated list of state and local sales tax rates, it’s easy to get overwhelmed. There are a few core principles to remember when you’re starting.
- Collect your invoice data by state on all SaaS transactions so that you can accurately calculate the taxes based on the state’s rules and ensure compliance.
- Ensure your team and customers know the sales tax to smooth the process and make reconciliations easy.
- Select an invoicing system that calculates sales tax for you. It’s also essential to have a system and an experienced SaaS CFO to track and record any sales to make tax computation easier.
- Be proactive and get ahead by registering in states you sell in to avoid penalties.
- Leverage automation wherever you can. This will save you time and money while helping you to comply with state and federal regulations.
Don’t Push SaaS Sales Tax to the Backburner
If you’re running a SaaS company, ensure your SaaS sales tax processes are to avoid fees, penalties, and legal trouble. Register in the states you operate in, invoice data by state, leverage automation, and ensure your team and the customers are aware of the tax.
SaaS sales tax calculation and reporting are complicated, especially for small businesses. Fortunately, Founder’s CPAs specialize in helping SaaS businesses with their sales tax compliance needs. Our accountants and finance professionals are experts who understand the nuances of SaaS accounting. Contact us today and get started developing a system that works for your business.
