Before launching your business as aSaaS businessbusiness, it is necessary to learn to master the ins and outs of taxation specific to SaaS. Too many mistakes are generally made by entrepreneurs, whether they are beginners or experienced, which prevents them from making their business to thrive. properly.
In addition, the tax system specific to SaaS is known to be complex and changing, which requires you to be constantly aware of changes in legislation to remain strictly compliance with the law.
Finally, the tax system also changes as your business develops. business. If your SaaS is growing and expanding, it is likely that the requirements for sales tax will also change!
That is why we have compiled a list of list of typical sales tax mistakes mistakes SaaS companies make when it comes to sales tax, to help you stay on top of the law and ensure your growth for 2023 !
The essentials of SaaS taxation
Before we look at the sales tax mistakes made by many SaaS companies, let's first clarify a few terms.
Sales tax is the tax collected by a retailer from a customer when a sale is made. The retailer then remits the money to the appropriate taxing authority as required by law.
Are SaaS products and services taxable?
Software as a Service (SaaS) is taxable in many countries around the world, and the number is growing.
When a customer makes a purchase from your SaaS company, you may be required to collect taxes in the jurisdiction where the customer purchased your product. Take the United States, for example:
In states where SaaS products are taxable, two broad categories apply:
- tangible personal property;
- computer or data processing services .
Some U.S. states classify SaaS as a product, while others consider it a service. Needless to say, this situation is often confusing and frustrating.
10 common sales tax mistakes for SaaS companies
1. Missing integration points
SaaS companies tend to have complex billing and payment processes. There is often more than one way to create an invoice, and more than one place to edit its contents.
One of the first mistakes finance managers make is to focus too much on the integration source and ignore the other surfaces that can change an invoice. Even within a single integration, there may be multiple ways to update an invoice.
Think cancellation, refund, credit note and rebate. So your tax engine needs to be attuned to all the integration events that can change an invoice. The most prudent way to approach the problem is to conduct an audit of your billing process.
You must be wondering not only where we issue the bills, but also how we make the repayments? How do our credit notes work ? Is there a way, outside of my billing process, to cancel or refund a transaction?
If you have any questions, be sure to test these processes before you put them online.
2. Not informing customers of the sales tax
Once the integration has been tested and is ready to go, there's one last thing you need to do before taking action: inform customers. Communicating sales tax changes to customers can be tricky.
Do this by effectively messaging the "why" and "how " of the calculation to customers, and give them the opportunity to obtain sales tax exemption certificates, if applicable.
3. Focus only on the economic link
Most of today's tax engines monitor the economic nexus, but often overlook the physical nexus. In a world where the trend is toward remote work, this mode of exposure is increasingly common and difficult to navigate.
Today's best tax engines can record and automate the physical nexus. This is a critical element in revealing your company's true exposure.
4. Tax exemptions on missing sales
A sales tax exemption certificate allows a buyer, for whatever reason, to purchase a product tax-free when that product is normally subject to sales tax.
It probably comes as no surprise to you that sales tax exemptions vary by state and local government and change from time to time. We recommend that you check each year to see if any of these exemptions apply to your product.
Not keeping up with tax exemptions can lead to serious tax complications. If an exemption certificate expires or is invalid, you may be liable for uncollected taxes.
It is therefore essential to develop a system for tracking tax exemptions and tax exemption certificates to avoid revenue losses.
5. Attribution of tax liability based on the secondary reason for purchase
A bundled transaction is the retail sale of two or more distinct and identifiable products and/or services sold at a single non-itemized price. Generally, tax liability is based on the product that represents the primary reason a customer purchases the bundle.
However, it should be kept in mind that states may take a variety of approaches to determining the primary reason for the transactions. Some states may consider the most expensive component of the bundle and base taxation on that classification.
Other states may be based on the "real thing," meaning you would have purchased one component as a standalone offering, but not the other. For SaaS, this can be important depending on the composition of your product.
You may have a telecom or storage component in your SaaS product, but as a whole, the product may fall under the taxability rules related to one of these subsets or be taxed as a general SaaS.
If you are bundling products, you must have a detailed understanding of the components that make up the product and keep track of the method you use to classify the taxability of your product.
6. Ignore delayed adjustments in your business
If your SaaS business is seat-based or volume-based, it's common to have a delay between the billing date and when the adjustment calculation occurs in billing at the end of each month.
Let's say you bill on a volumetric basis and only measure customer consumption every 48 hours. You'll want a tax engine that can close your returns at the time your billing system recognizes the adjustments 48 hours after the end of the reporting period.
This will help with reconciliation and ensure that your accounts match.
7. Do not automate the deposit frequency
The reporting frequency is based on your sales in a given state and the respective reporting guidelines for that state.
Oftentimes, financial managers choose the wrong reporting frequency from the start, or don't realize that their sales have exceeded a state's reporting guidelines and need to switch from quarterly to monthly reporting.
The best tax engines automatically suggest the reporting frequency in each state and detect when you need to change that frequency based on your real-time sales.
8. Misunderstanding of taxable items
Did you know that each state defines SaaS differently? That's because it doesn't fall under the categories of "tangible personal property" or "specifically enumerated services."
For this reason, your SaaS product may not be taxable in your home state, but may be taxable where your customers make their purchases. The mix of sales tax requirements will be different for almost every business.
Therefore, we strongly recommend that you clarify where you are submitting documents or have an established nexus and then investigate how those states interpret sales tax compliance for SaaS products.
9. Manual filing
Finally, a common mistake made by finance managers is to opt for manual reporting.
With your many other priorities, it is inevitable that projects will slip and filing deadlines will be missed.
By setting up your tax engine to file on your behalf, you can be sure that you never miss a single return and never incur late penalties.
You'll never have to worry about sales tax returns again.
10. Not filing a return because you didn't collect taxes
Some companies think they don't need to file a tax return because they haven't collected any taxes in a given period.
However, many states require you to file a return at the end of the period, even if you did not collect any tax, which means you still have to file a "zero return."
Again, failure to report sales tax can result in late or non-filing penalties , and your account could then be considered non-compliant.
Need funding to correct your mistakes?
There are many solutions to correct the various errors mentioned in this article. A lot of tools and solutions will help you to solve these problems. Nevertheless, these solutions have a significant cost, justified by the expertise they bring to your company. Revenue Based Financing and Karmen are here to help you support your cash flow during this corrective period.
The RBF is a non-dilutive loan
The major comparative advantage of the FBR is its speed and the non-dilution of the capital. Indeed, unlike a fund raising, the RBF is a non-dilutive solution.
But what is capital dilution? Dilution is when a company has to give a part of its share capital against investment. The increase of the capital by issuing new shares will generate this dilution.
The major disadvantage of dilution is that the entrepreneur at the helm loses decision-making power. The issuance of new shares will create new voting and decision-making rights for the new investors.
This dilution, therefore, leads to a lower return per share.
Karmen avoids this dilution while being a fast and digitalized solution.
A financing offer for SaaS? One Response: Karmen
Indeed, Karmen allows digital companies to finance their growth in a non-dilutive way and very quickly.
At Karmen, the investor has no direct ownership in the business and does not require fixed payments. Payments will be based on the company's revenue . Karmen uses a tool to anticipate the future revenues of a business.
In concrete terms, if your income decreases during a month, the royalties to Karmen will be reduced proportionally . Conversely, if the company's revenues increase drastically during a month, the royalties will increase simultaneously.
Karmen offers an alternative to fundraising that allows more companies to finance themselves.
Indeed, Karmen does not have any particular requirement on a business sector or an ultra-tech product as a venture capital fund may have.
Getting a quick loan is the essence of Karmen's offer, as a business can receive cash in less than 48 hours.
Don't be guessing anymore when it comes to taxing your SaaS business. This list of ten common mistakes made by SaaS owners and how to avoid them should help you navigate this maze of changing and complex jurisdictions.
If you were to remember only one thing: don't be afraid to seek professional help so that you don't waste time or money when filling out your tax form. Beyond your duty to comply with the law as a citizen, getting informed about your company's taxes could stabilize your business over time.
If this article has inspired you to learn more about the mechanics of SaaS taxation, don't delay in contacting the experts at Karmen experts to help you navigate this jungle of jurisdictions. Karmen has developed an instant cash flow tool to avoid the risk of dilution when raising funds. It will surely be very useful in your business!