Selling subscriptions to generate recurring revenue is the biggest concept in business right now. After all, why collect payments once when you could do it repeatedly? Data shows a 500% increase in subscription-based businesses in recent years (far outpacing “traditional” businesses), and that growth isn’t likely to slow down anytime soon.
But with the tremendous success of this business model comes something else: increased scrutiny from regulators.
As more revenue flows into subscriptions rather than goods and services as we normally think about them, state governments have been scrambling to update their sales tax codes. Subscription revenues were taxed lightly, loosely, or not taxed at all before – but that’s changing fast.
At time of writing, 19 states levy some form of sales tax on Software as a Services (SaaS) subscription revenues. But in eight of those states, the tax only applies if the company has a server within state lines. And in six states, the tax obligations are different based on whether the software is used for business or personal use. Just identifying where sales taxes do and do not apply is one challenge facing SaaS companies.
Another challenge is determining why they apply. Some states classify SaaS offerings as products, others classify them as services, and tax liabilities vary accordingly. This adds another layer of complexity to paying SaaS sales taxes in the right states and amounts.
Over time, more states will likely switch to taxing SaaS subscription revenues until companies eventually have to manage 50 separate sales tax codes. This issue will undoubtedly get more complicated for SaaS companies. And as tax debts and penalties grow, it will get more consequential too.
For anyone in the subscription economy and everyone in SaaS, now’s the time to get serious about sales tax accounting. That’s easy with Sage Intacct
Sage Intacct for SaaS Sales Tax
Sage Intacct, a cloud-based financial management platform, not only facilitates the unique accounting requirements of SaaS companies but addresses them directly with purpose-built features. SaaS sales tax is a prime example.
Accountants with Sage Intacct can add sales tax directly to contract invoices so that this obligation, whatever form it takes in the future, integrates organically with existing accounting workflows. Similarly, since Sage Intacct integrates and automates more aspects of accounting, including invoicing and recurring billing, accountants get a faster and fuller view of taxable (versus nontaxable) revenues to accelerate sales tax calculations.
Sage Intacct streamlines things even further by letting users build custom tax jurisdictions and mark specific customers or items as taxable to clear up confusion about applicable tax rates. Users can manually add a sales tax percentage so that changing rates is easy. And they can report on sales tax liabilities to see how they affect financial performance and strategic planning.
Sage Intacct comes standard with powerful tools to monitor, manage, and minimize sales tax liabilities across states, and do the same for VAT (value added tax) plus GST (goods and services tax). But complementing the native Sage Intacct tools are integrations that add best-in-class capabilities – for calculating state sales taxes and so much more. SaaS companies that want to expedite and even automate sales tax calculations can link their accounting hub, Sage Intacct, with powerful tools that automatically update when state tax laws change.
Whether on its own or integrated with something else, Sage Intacct makes SaaS sales tax simple. Don’t let this be a liability or a struggle. Sage Intacct solves the sales tax problem while delivering everything else an advanced accounting platform can do. For SaaS companies feeling the need to upgrade their accounting, Sage Intacct is a clear choice – and RSM is the ideal partner. In addition to implementing Sage Intacct, our sales tax and VAT specialists are here to help clients with all aspects of tax compliance. For an immediate, sustainable, and scalable solution to SaaS sales tax, talk to the team at RSM.