Helping SaaS Firms Make Sense Of eCommerce’s Tax Complexities

Beyond the challenges of the pandemic that is forcing businesses to grapple with all manner of operating challenges, tax complexity has been building over the years on a global stage — and it’s only going to increase.

As Kurt Smith, vice president of product and strategy at FastSpring, told PYMNTS pertaining to software providers, “the world of eCommerce has seen an explosion, particularly relating to digital software commerce.”

Against that backdrop, and in reference to the special taxation needs of Software as a Service (SaaS) sellers, taxation and regulatory bodies have been playing catch-up with that explosion in digital commerce, said Smith. One significant example can be found in the 2018 Supreme Court ruling known as South Dakota v. Wayfair, which stated that online retailers could be mandated to collect sales tax – and that taxes could be levied on companies that do not have a physical presence in those states.

So far, at least some merchants have flown “under the radar” of tax collection because they have not hit certain sales thresholds. But now, with the economic calamity wrought by the pandemic, state and local governments are looking at ways to keep their coffers full — which, of course, includes tax collection efforts. That means they’re going to increase scrutiny on eCommerce as brick-and-mortar transactions fade.

The software industry is changing, too. As FastSpring CEO David Nachman told Karen Webster earlier this year, the traditional software business model is transitioning to a SaaS subscription model, in which buyers pay for continual access instead of for a single product download.

“We’ve seen a dramatic shift toward subscriptions — last year was the first year when the majority of our transactions were subscription-based as opposed to one-time downloads,” Nachman said. “And even if they haven’t yet done it, they’re talking about it. When we surveyed our customers, we saw that close to 70 percent were looking to make the transition in the next 12 months. We expect that number to continue to go up in the years to come.”

For these merchants, said Smith in the most recent conversation, “the tax rules are complex and challenging, and they are evolving at a more rapid pace as they sell into geographies where they might not understand the local rules” — especially as they enter new countries.

Consider an example: In Germany, there is a VAT holiday in effect until December of this year, aimed at providing at least some relief to the economy.

With a nod toward tax compliance services offered through companies like FastSpring — which also helps with processing payments and executing subscription, billing and pricing — automation is critical.

Said Smith, “unless you are using somebody who is calculating tax on a dynamic basis, and you have a platform that is pretty nimble, you might have a lot of pain associated with trying to accommodate those changes. There are many online merchants out there that have static, hard-coded tax rates in their systems.”

Each country, he noted, controls the ways products and services are sold within its borders — a challenge for larger firms, yes, but especially for software firms that have, say, 30 or fewer employees and might be trying to grow their businesses. These firms must know the thresholds for documenting and remitting payments, whether monthly or at the end of the year, and must constantly be on the lookout for new tax announcements.

At least some of those firms will have to include one or more full-time staffers dedicated to tax compliance. FastSpring, said Smith, uses a third-party tax service to ensure that the sales tax rate is up-to-date and that tax compliance is integrated with these smaller firms’ back-end operations.

Business owners, he said, “have to make really tough decisions right now. We are seeing more interest from companies as to how they can be leaner, and how they can shift their focus to growth operations rather than tax compliance.”