Getting started with tax
Getting started with implementing tax can be a potentially confusing process, even more so if you don’t have a background in it. This guide helps you prepare your business and customers for a smooth and successful path to compliance, covering the practical issues to consider when implementing a sales tax solution.
Prepare your internal team
The tax process may include many teams across your business, including the sales, accounting, and operations teams. Some key areas to prepare the internal team are:
- Ensure your customer contracts include terms regarding the customer’s responsibilities for paying sales tax
- Clearly communicate to your internal team what jurisdictions are becoming taxable and when
- Ensure that your internal teams onboard all new customers with an address for their location
- Mitigate any internal concerns around pricing.
Ensuring that your customer contracts include terms that specify and clarify that your pricing is exclusive of any indirect taxes is an important part of a smooth compliance transition. It's likely that your contracts already contain this type of provision but it is prudent to double-check if there is a need to revise your terms.
Below is an example of the type of language that your business could consider including:
"All Fees and other amounts payable by [Customer] under this Agreement are exclusive of taxes and similar assessments. [Customer] is responsible for all sales, use, and excise taxes, and any other similar taxes, duties, and charges of any kind imposed by any federal, state, or local governmental or regulatory authority on any amounts payable by [Customer] hereunder, other than any taxes imposed on [Company]’s income. To the extent that [Company] is required by law to pay any such taxes, duties, or other charges to any governmental or regulatory authority, [Company] may invoice [Customer] for such taxes, duties, or other charges and [Customer] will pay such invoiced amounts in accordance with this Agreement."
Check with your legal team to see if your current terms and conditions are sufficient or if additional language may be appropriate for your business.
Next, it is important to make sure that your internal team is clear on what jurisdictions are going to be taxable to customers and when. This clarity will ensure that the entire team from sales to customer support and accounting are prepared should any questions arise from a customer.
Formalizing a communication process is critical for when your business achieves nexus in additional jurisdictions. Your team will need to stay abreast of changes and where sales tax will be charged to your customers.
Consider sending out an email or posting to an internal wiki page for your company when a new jurisdiction is taxable. Be sure to note the first date transactions will be taxable so your team is clear on when the change will occur.
It is also important that your customer onboarding or sign-up process now includes gathering your customer’s address. As a seller, your obligation is to gather the location of your customer so that you can properly charge and collect sales tax. Without an address from your customer, your business may become liable for the sales tax due on the invoice.
Check out Anrok’s guide "Why is sales tax so hard to get right for SaaS?" for more information on address requirements, which are particularly cumbersome for sales tax in the US.
A common concern from businesses is that charging tax may cause customers to churn. At Anrok we have seen many sellers considering this issue and have overwhelmingly heard that SaaS software is not price-sensitive to the addition of tax to invoices.
In the US with an average tax rate in SaaS jurisdictions that exceeds 6% and the cost of non-compliance increasing that rate up to 11%, and globally the average rate is upwards of 20%. The money that is saved by charging customers for tax can be reinvested into your business to hire more engineers, sales people or invest in other projects.
As with any important project, preparation is a critical step to success. Implementing a global tax solution when your business is still small can help reduce the amount of time and effort required for preparation while change management is easier to execute on. Regardless of size, Anrok can help your business grow by guiding you through the process of getting tax implemented for your business.