Where do you need to pay SaaS sales tax?
We wish it was as simple as, "You need to pay this amount of sales tax in this country, and this amount in this country." It is not, but we'll share some pointers to help you avoid the aforementioned hefty fines.
For starters, we have a very useful SaaS Sales Tax Index for a run-through of sales tax jurisdictions around the world (and just how painful they are) — definitely one to bookmark.
But, seeing as you’re here already, we’ve whipped up the highlights below.
Sanctioned markets to be aware of
First off, we’ve got the sanctioned markets of the world. In accordance with anti-money laundering and international regulations, there's a list of sanctioned or restricted markets that you should be aware of if you plan to sell internationally. Countries have been placed on this list for political or security reasons, so it’s more than likely these markets won’t be supported by payment providers, compliance tools, or merchants of record.
Tax trends impacting the world
As the subscription economy began (and continues) to thrive, tax authorities in major markets play catch-up, with new regulations in the US, European Union, and the Middle East leading the charge:
- VAT MOSS – Introduced by the European Union in 2015, VAT MOSS requires you to charge sales tax where the customer is based, as opposed to where a company is headquartered or operating (has a “physical nexus”). Since 2015, a number of countries outside Europe have introduced similar regulations, many of which have no or very low tax thresholds.
- VAT system in the Middle East – First introduced in 2018, this system covers all Gulf Cooperation Council countries (Including Arab states of the Persian Gulf except Iraq). Over the last few years, countries like Japan, South Korea and Australia have also started requiring overseas sellers to register for sales tax.
- The South Dakota vs. Wayfair Ruling – This ruling introduced the concept of “economic nexus”, meaning that Sales & Use Tax is applicable when sales into a state are above a certain threshold — regardless of where the business is based.
Key global tax territories
To manage sales tax successfully, you need to comply with the regulations specific to the countries or states you operate in.
Here’s a heads-up on what regulations look like across a few major territories:
The United States
Due to a lack of a blanket tax system, the US sees over 11,000 tax jurisdictions across its states, counties, and cities. With different rates in most states, and even different tax treatments for various types of software and digital goods, it can get confusing quickly.
A good example of this is that in New York, electronically downloaded software and SaaS are taxable, but digital books and other digital goods are not. Whereas, in Colorado, electronically downloaded software and SaaS aren’t taxable, but digital books and other digital goods are. We’re an indecisive bunch, aren’t we?
But, how is a software product or service defined in the US? While different tax treatments apply, the jurisdictions depend on these main factors:
- Whether the software is delivered via a physical medium (CD or USB)
- Whether the applications or software is downloadable
- Whether the SaaS product or software is cloud-based
From determining where you should be registered, to filing and remitting tax payments in each and every jurisdiction, managing sales tax in the US is undoubtedly a complex process. That’s why you’ll need either an in-house tax expert or the advice of a tax firm (who will charge fees for each state they examine).
Countries in the European Union tax software at different rates, with the taxes being paid through a system called VAT MOSS.
VAT MOSS came into action in 2015 and it meant that the rate of tax charged in the EU applies to the rate of the country in which the customer is based, rather than the company making the sale. This averts the problem of companies setting up their EU headquarters in a country with a low tax rate, like Luxembourg, and being able to apply this rate to all of its EU sales.
As a result, companies have to make filings for all EU sales from their home country (or designated country if they’re a non-EU business), creating quite a complicated filing process. Software companies now have to keep up to date with all the different rates of VAT to charge in each country within Europe, collect and retain evidence of each sale, and then allocate sales by country for their filings.
And, just like all other tax regulations, the rates within VAT MOSS are all subject to change. Often referred to as VAT MESS, you can probably sense the frustration already.
Because of Brexit, the United Kingdom is no longer included in the VAT MOSS system for sales into EU member states. That means, if you’re a UK business selling into the EU, you must register for VAT MOSS in an EU member state or register for VAT in each member state your business sells digital services into.
UK VAT will still be applied to sales into the United Kingdom, although the tax filings may look slightly different. For non-registered businesses, there isn’t a threshold for sales tax which means you’re liable from your first software sale in the UK.
And the rest of the world
Unfortunately, it isn’t as easy as saying, "and the rest of the world" at all. We only covered a few key global tax territories, and we’re sure you aren’t surprised to hear that there are plenty more for you to get to grips with.
If you haven’t already, head to our SaaS Sales Tax Index. There, you’ll get a good sense of how high your chances are of owing tax in different countries, and get all the facts you need on how to best manage your tax compliance as a scaling software business.