Before we start discussing the method of filing SaaS sales tax returns, we would like to address the most commonly-asked questions of the SaaS entrepreneurs “Is the SaaS taxable?”
SaaS Companies serve their customer both domestically and globally. SaaS business is growing at a dizzying pace and will likely achieve a 21.2% CAGR by the end of 2025. That’s the reason the tax liabilities of the SaaS businesses are increasing at an alarming rate.
To mitigate the potential threat of any lawsuit on your SaaS business, we strongly recommend you keep an eye on the VAT, GST, and sales tax. They are three main taxes that are usually applicable to your SaaS product.
Additionally, the taxability of your SaaS Company is solely dependent on the host country and state tax laws. However, as an owner of the SaaS Company, you need to ensure that the lack of harmonisation of tax laws does not impact your business’s growth and sustainability.
Once you comply with all the tax regulations, you’ll experience your SaaS tax planning becoming more effective than ever before.
Here is everything that you need to know about the SaaS sales tax.
Types of Sales Tax Applicable Around the World
Almost all countries worldwide impose some sort of consumption tax on goods and services to generate funds for public expenditure. A consumption tax can either be a flat rate applied to each unit of product sold or service consumed or a certain percentage.
Whatever be the case in the country where you are operating your SaaS business, one thing remains the same. The end consumers are always liable to pay the taxes because they are the ones consuming the product or service.
Consumption taxes can have many different names because each type serves another purpose. For instance, the EU collects consumption tax in the name of Value-Added tax, and Australia collects consumption tax in the name of Goods and Services tax.
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The United State follow its tax regime. In the US, the sales tax is only charged at the end user’s final purchase of the product or service. However, there is no uniform tax rate across the US; each state specifies its tax rate.
For this reason, SaaS Companies experience difficulty in dealing with the sales tax in the US. For instance, 45 states of the US and all the districts of Columbia collect sales tax. In stark contrast to that, Alaska, Oregon, and New Hampshire do not impose any sales tax at all.
Thus, there are too many tax jurisdictions across the US. Additionally, many countries use the secondary tax system to generate more revenue from the sales tax under the name use tax.
The use tax is designed to collect taxes from that businesses are otherwise not liable to pay taxes. To accomplish this goal, states impose taxes on business purchases.
Since the government can’t force companies to pay sales tax, they impose use-tax on the in-state customers. The in-state customers are liable to pay minimal taxes for their purchases outside their geographical location.
Minimum Requirements to Register for SaaS Sales Tax
Simply speaking, SaaS tax liability is an indicator of how much revenue your SaaS business is making from sales. Generally, when the businesses expand, governments want their cut.
On the other hand, if you earn a minimal amount, tax authorities are unlikely to impose any tax on you.
This difference in your earnings arising from the distinction in sales is referred to as the tax threshold. The threshold is expressed in a host country’s local currency. When your business sales exceed the threshold amount, your SaaS business is legally obliged to register for the local taxes.
Sales tax is typically applied to the sales of the SaaS Company that a company is earning from the resident of their host country.
Within a period of twelve-month. Although the threshold definition is centric around annual sales, some SaaS entrepreneurs misinterpret it as a sale within a particular calendar year. However, some policies cannot be limited to the January-December period.
From the business standpoint, “annual sales” are the total business sales in the last calendar year or sales that the company is expecting in the succeeding year.
For instance, in Australia, you need to register for sales tax if your sales exceed the annual threshold amount of $75,000.
On the other hand, some countries require you to document all your taxable income before the cash starts coming into your company bank accounts. Likewise, there is no minimum threshold for tax registration in some countries like India, so you need to register yourself before making the first sale. Other countries with no minimum threshold for tax registration are Russia, South Korea, and Turkey.
Regardless of your customer base or the product, always remember to double-check the country’s tax registration threshold when you aim to operate.
If you are experiencing a meteoric rise in your sales in the host country, consider referring to the threshold rules immediately.
Economic Nexus Threshold in the US
Following the South Dakota Vs Wayfair Decision, the US government enacts new policies to bring remote/online businesses into the tax network. These new policies are referred to as an economic nexus.
An economic nexus is a trigger that tracks all the major economic activities. For instance, net revenue you earned from sales in a specific state.
The most common threshold across all the states is $100,000. Some states specify an additional threshold based on sales volume that usually includes around 200 transactions per year.
How to Register For SaaS Sales Tax in Different Countries?
Once you have realised your sales tax liability, you must register yourself. Some countries have a pre-defined deadline requiring you to register for sales tax. Here is a quick overview of how to register for SaaS sales tax.
Tax Registration in the US
To start paying your sales tax liability, you need to have a valid sales tax permit. Collecting sales tax from the customers without the seeking permission of the state is deemed a criminal offence in some states.
Almost all the states allow you to register for sales tax online via their department of defence. In most cases, you’ll either receive your sales tax number immediately or within 10 business days.
Here are some credentials you need to provide while applying for a sales tax permit:
- Your personal contact information
- , Your business contacts such as mobile phone number, email, or social media id.
- Social Security Number (SSN) or Federal Employer Identification Number (FEIN)
- Business entity details
It is worth mentioning that you can register with all the 24 SSUTA states at once with one single registration process. This process might sound convenient at first glance, but it comes with excessive tax liabilities.
Consequently, you end up paying excessive taxes in some states despite not having a nexus there because you have registered there.
How to Calculate and Collect SaaS Sales Tax?
Once you have registered and collected the mandatory ID number or receipts from your customer, you then have to deduct tax from the transactional amount of your customer.
The very first step in the calculation of taxes is to list the price on your website inclusive of the taxes. When selling in Australia, you need to adhere to the laws.
Many states and countries do not require you to include taxes in your prices to apply taxes at checkout. However, it is a viable option to have sales at the product price ahead of time.
Calculate and Collect SaaS Sales Tax in the US
Here are the steps to collect sales tax from your US customers.
- Verify your buyer’s location
- Calculate the tax rate specified by the tax law. See whether the state has “origin-based” or a “destination-based” tax rates.
- Check all the tax rates applicable to your SaaS product. There could be more possible levels than a mere state-specific sales tax. Apart from that, there might be country, city, or state-specific sales tax rates.
It seems counterintuitive at first glance, but there are too many complexities around these three steps. A state can define their laws for taxing the SaaS product. For instance, in Texas, only 80% of your net revenue lies under sales tax jurisdiction, whereas 20% is exempted from it.
Calculate and Collect SaaS Sales Tax in Other Countries
Other countries have a uniform tax rate for SaaS companies, so the calculation process is straightforward and counterintuitive. When it comes to collecting sales tax, here are the steps you should take into account:
- Verify and validate the customers’ ID. Do they live in a country from where you are operating? If that is the case, validate their VAT/GST registration number. Before doing business with them
- Incorporate the tax amount into your pricing offer at the point of sales.
Staying up to date with the correct tax rates worldwide is a bit cumbersome task. You can leverage some automated tools for this purpose to make your life easier.
How to Record SaaS Sales Tax Accurately?
Tax authorities love proper documentation regardless of the host country. So if you are experiencing difficulty complying with international laws for tax registration and calculation, consider maintaining clean and accurate records.
Issues Regarding Tax-Compliant Receipts
Many countries are uncertain about what information to include in tax receipts or invoices to comply with internal tax laws. These receipts or invoices comprise all the information tax authorities need to conduct an audit.
Furthermore, tax receipts are insanely adequate for claiming any kind of tax deductions.
So, as a SaaS Company owner, you should always ask your accounts team to prepare accurate and proper tax receipts using the template issued by a host country.
A full tax receipt should comprise of the following information:
- SaaS business trademark and location
- Tax tax registration number
- The identity and location of the customer
- A unique tax invoice number
- A date at which the invoice has created
- A list of your company’s products/services
- Net VAT or GST applicable on SaaS product.
- The net amount customer is liable to pay
- The payment conditions, such as payment medium or for how long a customer is liable to pay taxes.
Refunds and Credit Note:
When a customer has funded an invoice and wants to refund full or partial payment, you must issue a refund with a credit note. A credit note is similar to the tax receipt, but it keeps the track record of the refunded money.
It seems counterintuitive and straightforward, but credit notes are imperative for the optimal growth of your business. Since you report all the money refunded to the customers, they are the legal proof that you don’t owe taxes on a large scale.
Keep Safe and Digital Records
It is a viable option to keep all your essential and confidential records in secure digital storage. Some governments even require you to keep the customer location evidence for many years. Moreover, it provides you with correct and the most relevant records in case of audits.
Marinating a digital tax record has become a necessity of the SaaS business. Due to an increased digitalisation of taxes, all SaaS Companies are legally obliged to file their income tax online.
How to File SaaS Sales Tax Returns?
Before you determine how to optimise business sales tax returns, you should first figure out how and why returns work in the real world.
You can file sales tax returns at the department of revenue website. However, the complete filling returns is a bit complicated.
- Note the frequency of returns.
Do you have to file returns monthly, quarterly, bi-quarterly, or annually? Generally, the more your sales are in the particular state. The more frequent you are supposed to file the returns. So, the frequency of your return filing is likely to change.
- Remember the Deadline.
Most states require you to file returns by the 20th of each month. So, you should avoid missing this deadline in order to avoid any penalties.
- Note the Breakdown in Tax Reporting
Some states do not require you to specify how much tax you have collected in the state you are working in. They just want you to pay your due taxes from the income you earn from the country, state, or locality. So, keeping an accurate record of your customer locations is crucial for correct tax filing.
Accounting Process for SaaS Sales Tax
Since SaaS Company acts as a mediator between the taxpayer and tax authorities, tax cannot be treated as revenue. In a SaaS business accounting, recording sales tax is a part of journal entry bookkeeping.
|Sales tax payable
SaaS sales tax can be challenging to deal with, mainly selling globally and needing to comply with international digital tax laws. Furthermore, if you have determined you are liable to pay sales, your next step should be to figure out how to comply with the state tax laws.
Even though every SaaS entrepreneur must be aware of tax compliance, they should not try to accomplish all the tedious tasks independently. Instead, they should seek the help of a tax advisor or CPA firm to make their life easier. Eventually, they can focus on expanding and upgrading their SaaS business instead of wasting their time and resources on the tax issues.
That being said, filing an accurate SaaS sales tax is a formidable task due to the accounting complexities involved in it. In this regard, consider seeking the help of https://freecashflow.io.