Whatever industry you are working in, you always have to deal with the taxes. SaaS business taxes are not different in this regard. In one of our previous articles, we have already discussed how to claim the tax credit in the SaaS business.
This article will walk you through the fundamentals of SaaS business taxes. Whether running a brick-and-mortar or an online retail shop, you need to be familiar with the tax arrangements applicable to that particular region and their work.
The Covid-19-induced lockdown spurs the growth of online businesses, but the peoples aren’t still sure about the future of e-commerce in the post-covid-19 world. Whatever be the case, one thing that remains the same is the tax implication related to the online retail business.
Tax laws vary significantly between different jurisdictions. So, if you are selling worldwide or living in a globalised economy, you need to be familiar with it. Moreover, you need to get your heads around SaaS business taxes.
Of course, establishing and running a successful online business is a cumbersome task. It demands tremendous efforts and hard work from the entrepreneur.
For instance, to keep your business afloat and stay relevant in the market for the long run, you need to select appropriate online bookkeeping and warehouse management software. Apart from all that, you must be familiar with the tax obligations you are liable to pay.
The business selling physical goods domestically or worldwide is liable to pay taxes. But the software as a service (SaaS) is also taxable. While running a SaaS Company, you have to be aware of different tax regimes applicable to you in other markets.
If you do not fully comply with the tax laws of the market you are operating, you’ll end up with a substantial financial burden in the form of penalties.
In the following section of this article, we’ll be discussing some thorniest and least-discussed issues related to the SaaS business taxes. We’ll cover all the major jurisdictions where your business might find difficulty dealing with the taxes.
By equipping you with this knowledge, we sincerely hope you’ll have a clear understanding of the tax implications you have to deal with.
We’ll limit our discussion to the SaaS industry throughout this article. Moreover, we’ll walk you through the tax thresholds for a different jurisdiction.
Dealing with the SaaS business taxes might seem a daunting task at first glance. The most crucial point to bear in mind is that despite the varying tax regimes across the globe, you cannot afford impediments to your business growth.
Once you are comfortable with different tax regimes, you’ll be able to expand your business aggressively without bothering with taxes.
Basics of SaaS Business Taxes
There is a myriad of misconceptions amongst the early-stage entrepreneurs regarding taxes. Taxation isn’t always as horrendous as people might think about it.
One common misconception amongst SaaS entrepreneurs is that if they are selling in a market where they do not physically exist, they are not liable to pay taxes. In reality, it’s not true.
That’s not true. While dealing with the taxes, you’ll find different tax laws and rates across various states of the same country. For instance, a federal government can impose a sales tax on goods and services in the USA, while different states can specify their tax laws.
Similarly, some states in the United States do not impose any sales tax at all.
It is evident from this example why the taxes are hard to deal with. For this purpose, you need to research the market requirements you are operating thoroughly.
To comply with the state tax laws, you need to consider different tax requirements. It includes when to file tax returns, whether on an annual, monthly, quarterly, or monthly basis, and the tax in which you have to pay the taxes.
Are SaaS Services Taxable?
If you are running a SaaS Company, it will be subject to taxation. However, precisely the SaaS Companies are taxed significantly from state to state. You need to do proper research about the market you want to target.
SaaS is perceived as digital goods, but it is a broad category and different states have varying tax rates for that. Moreover, it relies heavily on the market you are working in, which you must be aware of.
From the technical standpoint, SaaS is a cloud-based computing service provider in which the services are provided on a subscription basis rather than buying a software license. If you are running a subscription-based SaaS business, you’ll be subjected to the taxes imposed by the authorities in the jurisdiction you are working.
In the EU, Software is categorised as a digital good, so SaaS is taxable there. Digital goods are IT-based and non-tangible and are delivered via the internet or other electronic medium.
In the US, things work in a slightly different manner than we are accustomed to. Their existing tax definitions have no clause pertaining to the SaaS business. Additionally, tax obligations do not remain the same across all the states.
SaaS products are accessible via the cloud, but they are not perceived as ‘tangible goods.’ Hence, they don’t fall in the jurisdiction of US tax definitions.
In stark contrast, some states in the US treat SaaS as an electronically-downloaded software and impose taxes on it. Others perceive it as a service and do not charge any tax on the service. Hence, SaaS is not taxable there.
SaaS continues to gain public dominance with more and more peoples start switching to subscription-based services rather than buying software licenses. Therefore, many states are likely to impose taxes on it where there is currently little to no tax on SaaS.
Cautiously speaking, all the states that impose taxes on SaaS don’t necessarily force you to adjust taxes on your sales. Other factors also play a decisive role here. For instance, how much is your business’s total revenue, what’s the location of your product, how do you sell your product? and many more.
Why the SaaS Wasn’t Taxed Before and Why It is Now?
To understand why wasn’t SaaS taxed before, we need to perceive this fact from the state perspective. Before the advent of intellectual property rights, US tax authorities only impose taxes on tangible property.
As the SaaS has garnered substantial industry acclaim. Almost all people use some sort of SaaS product, such as Grammarly, Salesforce, or MailChimp.
To accommodate the transformational change in the industry, US Tax authorities have decided to amend their existing laws to bring SaaS into the tax network.
In 2020, Massachusetts Supreme Judicial Council issued a ruling that SaaS services fall under the category of intellectual property rights and are thus liable to pay their due taxes. As the SaaS becomes tangible personal property, states start imposing taxes.
Thresholds for Taxes
So far, we have discussed the basics of SaaS business taxes. In this section of this article, we will discuss how SaaS business is taxable in different states. You can only identify what all your business needs to comply with the tax regulations.
As we have already discussed, not all states have some laws regarding SaaS. Another thing a SaaS business should care about is the taxation threshold applicable to your SaaS business. If you are earning a decent amount of money from your SaaS business, your government wants you to pay them.
However, if you aren’t earning adequate money, you are unlikely to meet the threshold and are thus not liable to pay taxes.
In the EU, whether you are earning or not, you are obliged to pay taxes. So, if you are selling your SaaS product on EU premises, you need to register yourself. Whereas in Australia, the minimum threshold for sales tax is AU$75,000.
It implies if your total sales are below the threshold, you don’t have to pay the taxes.
Another essential point to remember here is that ‘economic nexus’ rule has entirely transformed in the past few years, soon after the Supreme Court Judgement.
Before the new amendment in tax law in 2018, no SaaS Company was obliged to register for the sales tax in a particular state of the US unless you have a physical existence in that state. That means physical presence was necessary to register for the sales tax that could be in the form of office, staff, or contractors.
The US authorities have made a drastic change in the tax regulations. All their tax rules focus on the ‘economic nexus’ rule. The economic nexus rule is somewhat similar to the tax threshold usually applicable on a minimum income of up to $100,000.
Some Actionable tips For Accounting and Compliance
If you are preparing for accounting compliance, you need to adopt an accurate accounting method. It is crucial to evaluate how much you owe the tax authorities at the end of the financial year.
As we have already discussed the lack of uniformity in the SaaS business taxes, the best strategy that you can adopt to mitigate this problem is acting proactively.
So, if you are entering into the new market, you need to make sure that your tax experts consider the inconsistencies we have discussed above. If you have to deal with new tax liabilities in the new market, you need to manage your finances accordingly.
It is entirely natural to be optimistic and ready to take challenges in a new market, particularly if everything is going according to your expectation. Many businesses fail to keep their tax planning with their business expansion.
You need to take into account what exactly are you selling. Are you just selling complementary services to promote your primary product lines? If that is the case, revenue allocation should include tandem with the standalone prices.
Furthermore, you should avoid recognizing upfront revenue as it could be devastating for the financial health of the SaaS business. Because if a customer cancels their subscription ahead of the completion of the contract, you’ll end up with economic turmoil.
Most importantly, you need to stay abreast of any noticeable changes in the relevant tax rules and requirements. We have already noticed that many new players are entering the SaaS market each year as it is a relatively nascent concept.
Thus, we can expect more drastic changes in the SaaS business taxes in the upcoming years. So, if you are operating in a market where there is little to no tax on SaaS business, you should remain prepared for any possible change in the tax laws.
If SaaS garner a substantial market share, there will be no more changes in the tax regulations anywhere in the world. But that’s not going to happen anytime soon.
Thus, we strongly recommend you stay in touch with your accountant to remain abreast of any possible changes in the tax laws on the horizon.
Filling Tax Returns
Tax returns work in an utterly different manner that solely depends on the jurisdiction. You should bear in mind the requirement of the specific territories in which you are operating. Figure out how frequently you are legally obliged to file taxes returns.
Then, explore the last data for tax return filing and what kind of breakdown can you expect from the tax authorities.
Additionally, the procedure you have to follow to file tax differ significantly from product to product. Some states or countries allow you to file taxes online. On the other hand, some might require you to file taxes via physical paper.
Never forget to seek the help of a CPA firm or a tax expert in the jurisdiction where you are operating to help you comply with the tax laws. It could save tremendous time and efforts that would otherwise have been wasted on SaaS business tax issues.
Automation Simplifies the Collection of Tax
With an abundance of SaaS startups, many countries and states impose taxes. More countries and states are likely to bring SaaS into their tax network to generate additional revenue for the cash-strapped states.
As laws keep changing, it can be wiser to leverage the power of automation to manage the complexities around SaaS business taxes.
I sincerely hope this descriptive article will help you understand all you need to fulfil while selling your SaaS products worldwide? Businesses, either small or conglomerates, expand beyond their premise and pay taxes regularly. So there is no reason to lag in this race.
There is a lot of uncertainty around this phenomenon at this moment, and a lot of your customers might be facing difficulty in exploring the new market.
E-commerce business owners might be exploring automated bookkeeping software, so they can manage their finances effortlessly and spend their time and another resource efficiently.
The SaaS Company can assist business owners in adapting to the evolving market needs while ensuring they achieve their desired goals.
To keep providing valuable service to the customers as a SaaS business owner, it is imperative to recognise the tax liabilities of your SaaS business. In that way, you can comply with the tax regulations in the market where you are operating. Fortunately, platforms like freecashflow.io/ can inform you pertains to any noticeable change in the tax regime.