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Navigating The Uncertainties of SaaS Sales Tax

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Tal Bar David

The relationship between sales tax and SaaS (software as a service) products is about as complicated as tax gets. And one of the main reasons lies in the conundrum of its classification. 

Is it a service, a product, or software? The differences in classification is where the complexities begin as each state in the USA is trying to adapt their tax legislation to the digital world around them. 

This disjointed conundrum of SaaS sales tax makes compliance increasingly difficult. 

Fortunately, you don’t have to be. Not when you’re prepared for the factors that impact your sales tax nexus as a SaaS company. 

How does sales tax affect your SaaS?

SaaS is a revolutionary leap in technology. Watching as the software and service industries combined to simplify the way solutions are delivered and accessed daily has been incredible. 

And then the taxman had to take at least some of the steam out of the SaaS sails by muddying the waters of tax liabilities. Sales tax is levied against goods sold and services rendered. Simple enough. But is SaaS a product or a service? 

That’s the question each state has been asking itself since Salesforce launched the SaaS industry with its CRM system. And even though tax laws have evolved to include digital products, only 22 states are actively taxing SaaS transactions to some degree. 

And even in these states, it’s important to be aware of how SaaS is taxed so you don’t miss out on exemptions. For instance, SaaS is considered a data processing service in Texas, and as such is only 80% taxable and 20% exempt from sales tax. And in Colorado, SaaS for business use is only taxed at the rate of 1%

So is SaaS a service or a product? It’s clear that this is a question that states simply don’t agree on, which makes the taxability of SaaS sales tax such an intricate affair. 

And because of the evolution and intricacies surrounding SaaS sales tax that your nexus may change or be altered without you even being aware of it. 

The worst part is, you’re not the only one paying attention to your tax liabilities. 

Your SaaS is on the radar 

Miscalculating your tax liabilities can leave you with stringent tax penalties, and a hefty amount of payable taxes in arrears. Amounts like these can cripple companies if they go unnoticed for long enough, pulling the brakes on your growth quickly. 

Accidents happen. Even in the tax world. And sometimes no one even notices. 

But not when you’re a SaaS company. 

SaaS is an industry that’s growing at a rapid rate, especially in post-Covid times where accessible cloud-based software services have been booming. That growth also makes the SaaS industry a valuable source of tax income that had previously been mostly overlooked. 

And because authorities know there’s still a lot of turbulence and uncertainty surrounding SaaS sales tax liabilities, they are increasing audit activity to ensure compliance wherever they can. 

Due to that same uncertainty surrounding SaaS tax, audits often leave companies with the responsibility of backdated sales tax as well as the accumulated non-compliance fines. 

And beyond financial costs, correcting your sales tax by increasing prices for existing customers can lead to reputational damage and loss of trust. 

So how do you avoid accidental non-compliance? 

How to manage your sales tax obligations as a SaaS

The world has become a far smaller place than it was not so long ago. And we’re not talking about hollow-earth-flat-world type conspiracy theories here. We’re talking about connectivity. 

Keeping track of tax liabilities used to be simple due to physical nexus and economic nexus relying so closely on one another. Today, a business in one state can not only serve companies in any other state; they can do business with the entire world from the comfort of a few living rooms. 

So how do you manage your sales tax obligations more effectively in this “small world”? 

1. Monitor out-of-state transactions carefully

Doing business across state lines is one of the biggest nexus triggers for SaaS companies. Monitoring your nexus thresholds for specific state and local jurisdictions will help you add tax where tax is due.  

However, you need to monitor changes in sale and invoicing thresholds regularly, as an economic nexus can be triggered overnight with a single sale. 

2. Keep careful track of remote departments 

The technological accessibility that has made SaaS products so effective is also the reason why physical nexus events are more intricate than ever before. 

When you’re working with a remote or traveling team, your physical nexus is no longer necessarily your office. It’s not even the state your business is registered in. It’s a jigsaw of your staff’s locations, wherever they are in the US (or the world). 

A salesperson regularly going to trade shows or conferences where transactions take place can easily trigger a physical nexus in a new state. 

To ensure tax compliance born from a physical nexus, you need to keep track of employee locations. 

3. Automate your sales tax solution

Automated processes can simplify an otherwise grueling manual workflow. Through process automation, you can identify physical and economic nexus triggers instantly, manage due diligence documentation more effectively, calculate local sales tax specific to locations and classifications, and even issue payments directly to tax authorities. 

While these steps are simple enough in theory, they require constant monitoring and dedicated attention. And taking a misstep can be one of the most expensive mistakes a business makes. 

But what if you didn’t have to do it alone? 

Finding your way out of the maze with Complyt

Complyt can help you automate the crucial steps on the compliance journey, giving you the vital assurance you need when it comes to certification management, audit documentation, and constant compliance monitoring in all your nexus states. 

All on one accessible platform. 

Complyt has worked with leading companies in the SaaS field helping to simplify and automate compliance in one of the fastest growing industries in the world. Our easy integration with ERP systems, billing systems or gateways (and also HRS) make the compliance even smoother, helping you monitor nexus triggers of every type. 

Let’s show you how we can help you get out of the maze of SaaS sales tax compliance. Book a demo today

 

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