Sales tax is a must for any business that sells goods or services in-state. Although, when it comes to Software as a Service (SaaS), some companies don’t know whether or not the sales tax can be applied. In this article, we will discuss all of the important things you should know about SaaS and when it is considered taxable.
What is sales tax?
Sales tax is a tax imposed by the government on the sale of goods and services. Establishing and managing sales tax compliance can be a complex task for businesses selling SaaS products. As such, it is important to have a basic understanding of sales tax and how it applies to SaaS products.
The amount of sales tax due varies by jurisdiction, so it is important to be aware of the rules and regulations in the areas where you sell your SaaS product.
How do you collect sales tax?
As a SaaS, it’s critical to understand the process of collecting sales tax from customers. Depending on your jurisdiction, you may be required to collect sales tax from customers based on their location.
Usually, collecting sales tax is a four-step process:
Identify the location of your customer
Determine the applicable rate for that location
Calculate the amount due
And collect the payment
Some SaaS businesses choose to use a third-party service provider to manage their sales tax compliance. This can be beneficial as it can help reduce the administrative burden of collecting and remitting taxes. Ultimately, it’s important to understand the process of collecting sales tax and ensure that you are compliant with local regulations.
In which states is SaaS considered taxable?
As you may know, every state has its own rules and regulations. For SaaS, this is no different and it is only considered taxable in 22 states. These include:
Alabama
Alaska
Arizona
Connecticut
Hawaii
Iowa (personal use only)
Kentucky
Louisiana
Massachusetts
New Mexico
New York
Ohio (business use only)
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas (80% taxable)
Utah
Washington
Washington D.C.
West Virginia
What are the penalties for not collecting sales tax in-state?
Failure to collect sales tax in-state can have serious consequences. Understanding the laws and regulations regarding sales tax in your state will help you avoid any penalties.
Not collecting sales tax could lead to a civil penalty of up to 25% of the amount of tax due, or even a criminal penalty, such as imprisonment.
Additionally, many states will require businesses to pay interest and late charge penalties on any unpaid taxes. It is also important to note that the failure to collect sales taxes could lead to the suspension or revocation of your business license.
Where can I get more information about sales tax in my state?
If you’re looking for more information regarding sales tax in your specific state, first check with your state’s Department of Revenue or Taxation. They will have the most accurate and up-to-date information on applicable sales tax rates and exemptions.
Additionally, you can also find helpful resources online, such as the Tax Foundation website. Here, you can find state-by-state summaries of sales tax laws, as well as other helpful resources. With these resources at your fingertips, you can be sure to stay informed and in compliance with your state’s sales tax laws.
What if I need to collect sales tax globally?
If you are a SaaS company that has global customers, you need to be properly prepared to collect sales tax from them. This means remaining in compliance at all times. In order to achieve this, you should:
Consistently monitor changes in international tax rules
Accurately calculate how much tax is due in each area
File and remit your payments in accordance with their tax authority’s schedule
Also, in order to sell globally, you need to be able to accept payments in a way that’s most efficient. You can achieve this by:
Accepting and receiving payment in different locations and across borders
Accepting payments in different currencies
Supporting local payment methods
For more information regarding payments and how you should collect them, please visit this link.
What are some common mistakes when collecting sales tax?
Collecting sales tax is a necessary component of any SaaS business, but it can be complicated and time-consuming. Unfortunately, many businesses make mistakes when collecting sales tax, which can lead to costly penalties or other issues. Common mistakes include:
Failing to file returns on time
Failing to collect the correct amount of sales tax
Failing to keep accurate records
Failing to register with the correct state or local tax authority
Collecting and reporting sales taxes for your SaaS company can be complicated, especially if you own a start-up or you live in a state that just recently considered it taxable. However, once you get into the swing of things, regularly ensure that you are up-to-date on any new regulations or changes in the tax landscape. By following the information and resources provided, you can avoid any penalties in the future.