Struggling to keep up with digital taxes in the global marketplace? You’re not alone. In the U.S., states were initially slow to adapt to digital download taxation, then suddenly enacted a wave of new rules. European Union countries apply varying amounts of Value Added Tax (VAT) on imported digital services, in the name of fairness to EU sellers.
It’s a lot to absorb. And SaaS sellers must get it right or face penalties from both their home country and countries abroad. Failure to register for VAT, or to apply it correctly, can result in thousands of dollars in fines and even lead to your SaaS product being banned from selling in certain countries.
Here’s a look at how to comply with tax laws and preserve the reputation of your SaaS company.
Taxation Within the United States
States in the U.S. have a mishmash of digital tax laws. North Dakota and Washington D.C. don’t currently tax digital downloads. Alaska, Delaware, Montana, New Hampshire, and Oregon don’t have retail sales tax at all.
Some states - Alabama, Arizona, Indiana, Louisiana, Maine, New Mexico, Texas, Utah, and West Virginia - decided to cover digital downloads without modifying their existing tax statutes or by simply expanding their definitions of “tangible personal property” to include digital products.
Numerous other states have enacted specific legislation, defining digital downloads various ways but always subjecting them to taxation: Colorado, Connecticut, Idaho, Kentucky, Nebraska, New Jersey, South Dakota, Tennessee, Vermont, Washington, and Wisconsin.
It’s a bit overwhelming, and the laws change constantly. Tax rates among the states also vary from 1% to 7%, making it tricky to keep track.
The U.S. federal government also pays attention to digital taxes. In 2011 the Internal Revenue Service (IRS) created the position of director of transfer pricing to investigate nationwide prices and taxation of SaaS products.
Taxation In the European Union
The E.U. established the VAT, which is applied to all imported goods and services, to encourage its citizens to prefer E.U. businesses. Digital products are broadly defined in the VAT, meaning if you sell to E.U. citizens, it almost certainly applies to you.
VAT rates vary among E.U. countries from 15 to 27% - something to keep in mind when pricing your SaaS for E.U. buyers. If you don’t account for the taxes, your digital product is going to look pricey next to E.U. competitors’.
Like selling to various states within the U.S., selling to various countries in the E.U is challenging because of the variety in tax rates and how they are applied. A few years ago, some SaaS companies tried to sidestep the whole tax issue by setting up small subsidiaries in E.U. countries. Don’t try this now; the VAT has been modified to apply to all sellers regardless of location.
Doing it Right
Obviously, it’s difficult to ensure your SaaS business is fully complying with local and international tax laws. That’s why experts suggest partnering with a digital commerce platform - a company that specializes in worldwide financial transactions.
An e-commerce platform like FastSpring stays at the cutting edge of tax codes and international law. This allows you to focus on developing and selling your service, while FastSpring handles transaction-level information like taxes.
Ready to see how FastSpring can revolutionize your back office? Click here to request your free demo today!