Ask HN: How to handle sales tax for SaaS side projects? | Hacker News Reader

Ask HN: How to handle sales tax for SaaS side projects?

14 pointsbillconan16 comments

I just realized how complex sales tax is. It seems to be a huge overhead for small projects. How can I handle it with ease?

View on HN

I asked this also on Reddit, and got this really nice answer:

Pasting it here hoping it will help others too

https://www.reddit.com/r/SaaS/comments/brvxgc/how_to_handle_...

I ran into the same issue with my startup.

There are two options:

Use a service like TaxJar / Avalara / Quaderno to automatically calculate taxes. Keep in mind that there are costs to getting a sales tax ID in certain countries / states and that you'll be losing valuable time by having to file returns (autofile isn't supported everywhere).

Also, you'll need to consider that they may not support every country that has a sales tax implication either.

Use a payment processor that acts as a reseller of your digital products (Paddle, 2Checkout, FastSpring)

Because they will act as the merchant of record for a transaction, they will be responsible for calculating and remitting sales taxes.

The disadvantage of this method is that there's much higher fees. For instance, Stripe charges 2.9% + 30 cents per transaction, while Paddle charges 5% + $0.50.

Not having to worry about sales tax is well worth the added cost in my opinion.

Agree. When you have a digital product or service, intended or not, you have a global customer base. Sales tax, VAT is just one of the burdens a company will face to keep on the right side of the rules. Denied party screening, export controls, various data protection and privacy laws, to name a few.

By selecting a provider that acts as the “merchant of record” (or reseller of your product), you offload many of those regulatory burdens to a party that has the proper economies of scale to provide the service for a lower cost than you can do it on your own.

Modern platforms that provide you with the option to be the merchant of record usually provide a host of other features that making running an online SaaS business much easier. And to your customers, it won’t feel like your sending them off to some unrelated store to buy your product, you can generally customize your integration so that the transition during the purchase process is mostly seamless.

Source: I’ve been in the business of providing a service that acts as merchant of record for more than 20 years. In the early days, people came to us mostly to for the online payment processing. These days, many of our customers express that it was the reduction in regulatory burden that they value the most.

Whilst I am happy for you and that your business of providing these services is doing well, it is a sad state of affairs when small online businesses have to cough up anywhere between 3%-7% of revenue to deal with the regulatory mess the governments have created.

I look at this from a different angle. Doing business is always going to be associated with some regulatory overhead.

Traditionally, the footprint of a small business was the owner’s local area, where the scope of rules and regulations is small enough that it can be managed.

With the advent of the Internet, it is now possible for a small business to have the same reach as a large multi-national. Along with this market potential comes a massive number of jurisdictions, each with their own particularities.

I find it quite liberating that a small business has the option to go to the entire world market by paying a small percentage of their sales (a cost that can be quantified and factored into their pricing model) rather than being forced to spend massive amounts upfront, without any idea if their investment will pay off.

Of course, there’s also the option to simply ignore the regulations, which many small businesses do (often out of ignorance). But as a business becomes successful, not following the regulations of the jurisdictions it does business in becomes an ever-growing liability.

I was a witness to a transaction where a small business was approached by their much larger (publicly traded) competitor. The larger company made an offer to buy this small business for many millions of dollars. During due diligence, the buyer discovered that the small business had not been collecting VAT in the EU for the digital products it sold there. The small business asserted that since it did not have an EU presence, the EU couldn’t force it to do so. The buyer, however, did have an EU presence, and worried that with the acquisition, it may inherit the large liability of many years of uncollected VAT.

This nearly wrecked the entire deal. The resolution was that the small business had to indemnify the buyer that if a claim was made by the EU for the uncollected VAT, the small business would be on the hook for most of it.

So, to me, paying a very small percentage to an external party to not only take on the burden of managing the regulations, but also to assume the risk of penalty for being out of compliance with any one of the thousands of governmental jurisdictions around the world seems like a very good value.

In US don't you only have to pay sales tax for state you're in (have Nexus)?

If you are in the EU remember that sales to companies will have reversed tax, just make sure to get their VAT number and then you don’t have to apply VAT. But I think that the invoice/receipt has to say that reversed VAT should be applied.

Sales to individuals should be declared in MOSS and the VAT of the country where the customer is located should be applied. But (at least in Sweden) there is an exception that if your revenue is under 10000€ per year you many declare all VAT in your country using your country’s VAT.

Also, IANAL.

Most states have sales thresholds to hit before you have to worry about dealing with it in their jurisdictions. Here's a decent roundup of when you'll have to start to care:

https://blog.taxjar.com/economic-nexus-laws/

Essentially, take care of the tax in the jurisdiction you're in and wait until you're much further along before worrying about other states or territories.

We ran into the same problem with our SaaS. We haven't gotten to the point where we need to solve the problem yet but in my research I ran into TaxJar (https://www.taxjar.com/) and was confident they will be one of the easiest solutions to the problem when we get to that point.

This of course assumes a US-based product/users.

So I found a service https://paddle.com/

Saying that they can handle all sales tax for me, because they are a reseller of my product. Is this true? Is anybody using it? Any other alternatives?

I use Paddle and so far I am happy with them. The integration was simple enough and their support has been responsive.

I cannot use Stripe in my country, so I had to look for alternatives. Paddle is more expensive, but they have many things built in that you would have to pay extra for on Stripe. One of those is the handling of sales tax. The other, which I will implement soon, is built-in handling of affiliates.

I think stripe can calculate taxes

Hey :) I'm actually from Paddle yes this is true as Jerriep touched on as well as handling all sales tax we take care of all the other complexities that occur when billing :)

But don't take my word for it! Boxy explained exactly why they used us better than I ever can: https://www.indiehackers.com/interview/how-we-grew-to-6k-mrr...

I’m not sure I follow. Services are exempt from sales tax

https://www.alvarezandmarsal.com/insights/sales-taxation-sof...

The law is murky at best. Doesn’t feel like something a startup should devote much energy to.

In Texas, if nowhere else, it’s established that SaaS is a “business service” and taxed appropriately either via sales or use tax. (Texas is unusual in taxing business services, however.)

you can check this, https://blog.taxjar.com/saas-sales-tax/

some states do charge sales tax.

I tried to do the sales tax management myself but ended up with incorrect calculation on some occasions. I would highly recommend getting a professional tax consultant for guidance. They'll know how to handle tax for your project. Once you start making revenue, the cost of consultant would become affordable.

Reply on news.ycombinator.com