Video: Do SAAS Companies Pay Sales Sales Tax?
SAAS sales tax does exist, it’s not just for tangible goods. A couple of years ago various states put into place SAAS sales tax.
So your first question is probably where in the US should I keep in mind that SAAS sales tax exists? And the answer is to go ahead and go to our website, we’ve got a map up there for you. It was created by Taxjar, they’ve done a wonderful job of outlining which states you want to consider for SAAS sales tax.
For example, New York does have a SAAS sales tax, whereas California does not. Next question we usually get is, you know, do I have nexus in that state? Is that sales tax applicable to me? And the answer is do you have nexus in that state? So do you have sales in that state, revenue or payroll? You’re going to want to work with your CPA to figure out whether or not you have a presence in that state and you do need to file.
Next question that we always get is how much is the SAAS sales tax? That really does vary state by state, so for example, Connecticut is about one percent, New York is about eight percent.
The last question we always get is, you know, how often do I have to file? Usually, it’s quarterly, but sometimes it’s monthly.
Of course we recommend that you work with an experienced CPA who know Software as Services businesses. Head over to our SaaS accounting page to learn more about how we’ve successfully served hundreds of these types of startups.
Who Should pay the Sales Tax for SaaS?
Should a SaaS startup add sales tax onto their customer’s bill or absorb the tax themselves? Here at Kruze we get this question fairly frequently from our startup accounting clients, and most of us think this sales tax should be added onto the customer’s bill. Let’s look at the rules of SaaS sales tax and why we think customers should foot the bill.
How do you Calculate Sales Tax?
There is a number of great systems that will calculate the sales tax for you and simply add it on top of the customer’s bill. These include software engines such as Avalara, TaxJar, and other VC-funded software. A couple of the VC-funded software engines will even do the calculations for you and also look at which state your customers are in so you can collect that data.
Please collect that data! Here at Kruze Consulting we need to know where your customers are, so we can do nexus determinations. It is really important to know where your customers are located, making combining of the collection of data with billing your customers their sales tax a very smart idea.
Why Customers Should Pay for Sales Tax
Sometimes companies will absorb sales tax themselves for a little while. This is often rooted in the sudden collection of revenue at material amounts, and not really knowing what to do at that point. There is also often a concern about a negative response from customers. However, absorbing this sales tax costs your company money.
You’re also setting an unrealistic expectation for your customers. If your startup pays those taxes, your customers may come to expect it, especially if you are a certain size. This means even more money lost as you grow, unless you have an uncomfortable conversation with your customers.
So pass the tax costs on to your customers. It will save you money, and it will help you become compliant and ensure you are doing all your processes correctly.
Don’t Forget to Remit Your Sales Tax
One thing we really stress is that you do not forget to remit the taxes you collect to the government. These will mostly be state agencies.
It is a very serious crime to collect sales tax and not remit it to the proper tax authority. Occasionally, we see companies in onboarding with us who have been collecting sales tax for six months but have never sent the checks to the appropriate government agency. That is a recipe for some serious financial penalties and potentially other charges.
So do not sit on that money. Do not co-mingle it. Get that money out of your bank account and into the government’s hands.
Remember, sale tax means you’re making sales!
It’s always an exciting moment when a SaaS company is big enough to even worry about sales tax. There are thresholds you have to meet and we’ve done a video on that too. You check that out. Or you can check out the Kruze sales tax page. But remember these three things:
- Add the sales tax to your customer’s bills.
- Collect the data on the sales tax by state for your accounting team.
- Do not forget to remit your sales tax!
If you have further questions on startup bookkeeping, taxes, startup accounting, or even venture capital fundraising please contact us.