As a business area, Software-as-a-Service (SaaS) has never been more popular. SaaS offers the flexibility, scalability, and cost-effectiveness that traditional software models often are too slow to deliver. However, with the rapid growth of SaaS, its taxation has become more and more relevant. In this article, our experts look at the key considerations of SaaS taxation and the factors that businesses need to be aware of to ensure compliance and avoid potential compliance risks.
Software-as-a-Service typically refers to cloud-based software applications, which are centrally hosted and accessed remotely by users via the internet. SaaS allows businesses to use tools and services on a subscription basis without hardware or upfront fees.
The best well-known examples of SaaS are:
Salesforce;
Google Workspace apps;
Microsoft 365;
HubSpot;
Trello;
Netflix;
Zoom;
Zendesk and etc.
When it comes to SaaS taxation in the US, it gets complicated. The complexity arises due to the intangible nature of SaaS and the slow adaptation of traditional taxation regulations to this new economic activity.
For example, if we consider the US, it is not easy to determine SaaS sales tax obligations. Sales tax obligations can vary significantly based on the jurisdiction where a business operates. Each state’s ruling has to be evaluated in order to decide whether SaaS would be treated as a taxable product or not. Moreover, there are states like Colorado or Illinois that do not treat SaaS as taxable products, but Denver and Chicago City has it’s own independent legislation and explains that SaaS sold in these cities are taxable.
So how to ensure tax compliance as a SaaS provider? Our advice is:
- Learn everything about your nexus requirements — assess your business activities to find out if you have sales tax nexus in specific states.
- Stay Informed — it might be worthwhile to check what developments from different jurisdictions arise in terms of digital economy taxation.
- If in doubt, consult with professionals. As SaaS taxation is currently in flux, it is advised to discuss your tax compliance with experts in the field.
1stopVAT’s team is ready to use its experience to provide guidance in navigating the complex sales tax landscape for SaaS and other businesses.