Presented by CereTax

Taxes for SaaS companies are complex — and that’s where tax automation platforms step in. Ever since the landmark Wayfair case in 2018, online companies have been scrambling to figure out how to collect and remit sales tax for all their customers, not just the ones in their physical location. The taxation challenge is multiplied for businesses that have multichannel distribution — which at this point means every company — and for SaaS companies in particular.

“If a SaaS company hasn’t established their tax policy correctly from the start, it could be extremely painful under their first audit situation,” says Brent Reeves, Chief Revenue Officer at CereTax.  

But today the latest technology, combined with knowledgeable support, can tackle the mounting challenges SaaS companies face. “The complexity of SaaS tax has reached the point where automation for efficiency, speed, security and accuracy has become a business necessity,” adds Reeves.

The growing complexity of SaaS taxes

As the SaaS market matured, governments realized they needed to keep up with changing technology, where previously, services in general were not deemed taxable. The ruling soon came that SaaS companies are, in fact, delivering a product — just in a new way. Unfortunately, many companies are rushing into the SaaS space without realizing their product is taxable.

The biggest challenge, however, is that SaaS is defined quite differently depending on what exactly a company is providing and what state and jurisdiction they’re in. In one state, a particular product or service might be taxable based on the state’s definition of SaaS, but, in other states, SaaS may be broken into different classifications. These classifications include information systems, data processing, or electronically delivered computer services and, therefore, may or may not be taxable. To add to the complexity, it can be taxed at discounted rates or even in tiers based on thresholds. It’s basically a mess.

“We like to say that a SaaS is not always a SaaS, and all SaaS is not created equally,” Reeves says. “That’s the biggest challenge I see with companies that are moving into that space — just understanding what their obligation truly is.”

“Most of the errors we see in taxation aren’t around an incorrect rate because rates are public,” Reeves says. “It’s mostly around defining a product incorrectly which may cause overpayments as well as underpayments.”

Addressing the audit pain point 

“Sales and use tax audits, which actually occur far more often than income tax audits, are another major challenge,” Reeves says. They’ve only gotten more complicated since businesses have gone to multichannel business models. For instance, a large retail company that has a brick-and-mortar store, in addition to their online presence and various other distribution channels, needs to manage the sales and use tax policy uniformly between each area. 

B2C companies want the customer experience to be the same, whether they’re in the store, online, or buying from a partner. Having a disparate tax policy between each system makes purchases and returns complex as well as making it more difficult to determine where liabilities are hiding.

Just gathering all the data necessary to defend an audit can be an obstacle, as is understanding when and where differing rules come in. For smaller companies, they might struggle with the process including how to register, when to file, how much to remit, and whether they need to remit at both state and local levels.

While a Fortune 500 manufacturer, especially one that self-reports, will be audited quarterly, smaller companies may not be audited for several years. But that isn’t necessarily a positive. If they haven’t set up their tax policy correctly from the outset, the first audit could result in significant fines and penalties.

“Most people moving into a new space don’t think about tax. They always think about revenue, about the front side,” Reeves says. “But the back side can be even more painful than missing sales projections.”

The evolution of tax automation platforms

Intelligent tax platforms go several steps beyond traditional tax technology. They’re cloud-native — unlike older solutions — so they offer the volume and performance of a true cloud solution. They’re also easy to train staff members on and optimize via an intuitive User Interface (UI) and can calculate across multiple channels at the same time using up-to-the-minute data and inputs to analyze transactions to make tax decisions.  

“It goes way beyond a simple transaction,” Reeves says. “It takes in all the elements of who the provider is, who the consumer is, where the consumption is being done, and what the purpose of the consumption is.”

For example, the CereTax solution applies deep data and research around when a product is taxable, where it’s taxable, and the amount that’s taxable — all that information is transparent — and directly accessible through the UI. Users can drill down to individual transactions to see how they are taxed and why. They can also get the statute and reference along with the definitions behind each state statute and reference.

Customers can realize tremendous ROI across three main areas. The first is automating the tax process to be real-time during the shopping experience. The second is the way it reduces the burden on IT staff. This is especially key for the tax-side, where IT resources can be stretched thin or channeled to other areas in the company. The third is the way that it offsets liability, which minimizes exposure to audits.

Of course, cost savings also come into play. For enterprise-level customers, it is not uncommon that one incorrect tax determination can result in hundreds of thousands of dollars in overpayments or liabilities.   

Setting a business up for success

“Tax rules are always 5 to 10 years behind technology,” Reeves says. As sales channels proliferate and ways of doing business and delivering products evolve, governments will get more aggressive on both the audit side and in finding ways they can apply tax to items that aren’t taxed today.

“When this happens, you need to have a better system to be able to justify everything that you’ve done and report on it,” Reeves says. “This involves a tremendous amount of data. You can’t spend weeks at a time with high-value employees in a tax department just preparing for an audit. You must be able to have that data at your fingertips so you can continue to do your business and not turn your main job into dealing with an auditor.”

Learn how a flexible, intelligent solution can mitigate the sales tax challenges that businesses face, now and in the future.

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