Tax & Subscription Revenue – The Taxman Catches Up
In Australia revenue recognition accounting changes (AASB 15) will impact subscription based businesses. In the USA the Supreme Court just made SaaS companies responsible for state sales tax collection and remittance. Understanding these changes matters for growth hunters in the SaaS community, so here’s a quick overview of what you should be aware of:
The subscription economy is booming. It is easy for companies to source solutions and self-provision across borders using only a credit card. This has raised the interest of global policy makers for international tax and accounting. To some extent, smaller SaaS players are being caught in the aftermath of the so-called “Google Tax”. International tax laws were changed to prevent multinationals like Google, Amazon, Apple and others from collecting revenues in one country, but only reporting receivables in other tax jurisdictions with far more favourable corporate tax conditions. This resulted in large scale erosion of the federal and state tax bases in many countries, and concerted effort has been made by a coalition of 43 countries to stamp out cross-border profit shifting.
The end result is there is heightened awareness from regulators, and legislation changes that may flow on to your organization if you use and/or offer SaaS subscription models on your business. It pays to stay well informed, so as well as reading our outline below, be sure to cover off the finer details with your tax and accounting advisers
The USA – no more sales tax free ride
In the US, for many years, it’s been a point of heated debate if sellers – particularly retailers – should be required to charge and pay sales tax in the states they sell but have no physical presence. Collection of tax in many US states has been governed by a concept known as “nexus”. This deems that tax is collected only in the State/s where a company has a physical presence. Tax is paid where revenues are collected, rather than at the point of sale.
This has been hotly contested over the years and in the recent Wayfair case, the US Supreme Court ruled that economic provisions was enough to create nexus for sellers. In other words, tax will be paid at the point of sales.
This decision affects SaaS companies as they may suddenly have nexus in states where they didn’t prior to the Supreme Court decision. For example, if a SaaS company makes $100,000 in sales a year to customers in a state where it has no office, employees, or affiliates – it may still be liable to sales tax. Each state makes its own laws about sales taxes and what “economic provisions” equate to “nexus”, resulting in a more complex compliance environment.
It will take some work to keep abreast of which States tax SaaS now and which will likely impose taxes following the new ruling. You will have to register to collect sales tax in any SaaS-taxing state where you are deemed to have nexus.
Australia – new accounting standards happening now!
In Australia, new accounting standard rules – known as the Australian Accounting Standards Board 15 Revenue from Contracts with Customers (AASB 15) – updates the way financial accounts deal with the subscription economy. They impact any industries which make substantial use of long-term contracts such as telcos, real estate and, of course, SaaS and subscription services.
Essentially the new standard will likely change the amount and timing of revenue recognized, as well as the nature and extent of financial statement disclosures. A five-step model is applied to determine when to recognize revenue, and at what amount. Revenue is recognized when a company transfers control of goods or services to a customer and, depending on particular criteria, revenue is recognized either over time or at a point in time.
This is one of the most significant changes to financial reporting in the last decade and came into effect as of January 1 2018. So if you have not already done so – now’s the time to talk to your accountant.
Keep your eye on the prize
No matter what tax jurisdiction you sell into it’s safe to say there will continue to be further changes and adjustments as governments tackle rapidly globalising online marketplaces. So stay ahead of the taxman, and the added flexibility, options and customer appeal subscription models provide will, in our view, continue to deliver you more customers and better customer lifetime value.