Same as any other entity (or person).
Entity pays taxes in it's domicile jurisdiction.
Best you talk with a tax preparer in your home country to ensure you have all the details.
And... If you're a US citizen + your SAAS company is generating massive cash, likely best to organize your entity in a low tax jurisdiction, like Bermuda which is home to Google, Intel, Verizon, etc.
And... best wait till Trump's new tax bill passes. If he has his way, corporate taxes may drop to a point low enough to keep your business in the US.
Great question, when it comes to business federal taxing they are taxed as any other but as a virtual service provider (non-physical) every state has a different law on that. The general idea is that some states don't have an import or sales tax law and or out of state law - so technically speaking you may have to file taxes completely differently than any other business out there because each state may vary.
If you end up having to send a tech to that area, you may have to to file especially for that state - I'm not a tax professional and you may have to talk to a tax expert in this field. One of the tax preparers I trust is Perla, she owns a bookkeeping & tax service - firstname.lastname@example.org
As an example, when I file taxes because provide consultancy services that are not physical or create software that does not transfer to any physical object I don't have to file separately on states unless I happen to send something to them - then I would have to file for that state.
One thing that is missing from other answers is cash vs accrual accounting. Cash accounting is typically only done by small businesses and ones that do not have the same timing challenges as a SaaS company. The largest difference is the cash received from a customer and the deferred revenue created. As a simple example... You have one customer who pays you $1 million on July 1 for 12 months of service. Let's further assume your operating expenses and cash paid for this 12 months of service is $700k (ratable monthly). As a cash payer would record in year 1, the taxable income of $650k and a loss of $350k in year 2. An accrual tax payer would have taxable income of $150k in both years. There are other financial statement impacts, from converting from cash and accrual accounting methods.
Taxes are assessed at 3 levels: federal, state, and municipal. We will disregard employment and sales taxes for these purposes. Broadly speaking, you will not have to pay full double taxation in two countries. The taxes paid to the foreign country will receive a credit or a deduction by your home country. Secondly, international sales can involve transfer pricing to a subsidiary which will impact the profitability in the foreign country. This is the point where you will want to consult a tax professional who is familiar with your product and the tax regulations of the countries you are doing business with.
Assuming you're talking about income tax and not sales tax etc it works like this.
1. All companies apply the tax rules of whatever country they are resident in, which usually means their worldwide income is taxable in that country this is true for SaaS and non-SaaS.
A company could be tax resident in multiple countries or none depending on local corporate residency rules and tax treaties.
2. Aside from this companies are a also taxable in local source income wherever they operate. This gets tricky especially for SaaS companies because "where is the income sourced?" this will usually be where the work is taking place if there's a fixed place of business or management level work taking place there but might also be taxed where the customers are located if the income is considered royalties income.
You've got to dive into the details of your individual case to see how these apply to you and of course it's in your best interest to structure yourself to minimize these.
There's also many cases where maybe technically you should be taxable but realistically you've got no exposure so in practice you won't be.
Finally, you could also be taxable based on the ownership of the company but this gets a little more technical.
Contrary to what was listed above Bermuda is rarely a good place to set up a SaaS company.
Hope that helps.
I will take the country as U.S. since no country has been mentioned in your question.
The term “Software as a Service” (SaaS) is considered to be part of the nomenclature of ‘Cloud computing’ along with infrastructure as a service (IaaS), platform as a service (PaaS), desktop as a service (DaaS), managed Software as a Service (MSaaS), mobile backend as a service (MBaaS), and information technology management as a service (ITMaaS). Finally, DbaaS (Database as a Service) has emerged as a sub-variety of SaaS.
Under a SaaS licensing agreement Software, you can normally find,
1. licensed on a subscription basis (per use monthly, annual, transaction/volume based etc.),
2. centrally hosted by the software provider and
3. delivered to and can be accessed by users via a web browser or a mobile application.
4. some services are included in such an agreement e.g. support, implementation of initial project/pilot, education etc. and additional services can be purchased separately from the software vendor or its partners.
Other terms used for this type of software licensing model are “on-demand software” or “software plus services” (a term mainly used by Microsoft). The SaaS licensing model, although well accepted these as a delivery method, has been on the ascendancy for quite some time and today many if not all, business applications, are available under that model and nearly all leading software organisations now have a SaaS product range in their portfolio including Financial software, Human Resources/Talent/Payroll processing Software, Sales & marketing software, office software, messaging software, Database software, security software, management software, Social media/ Digital media and content management software, project/collaboration software, invoicing/payments software, customer service software, CAD software, advertising, engineering software etc.
In general, there are two main varieties of SaaS solutions:
1. Vertical SaaS Solutions i.e. Software that addresses answers a specific industry requirement such in finance, real estate, healthcare, agriculture. etc. and
2. ‘Horizontal’ SaaS Solutions i.e. Software that more generically address common business such as sales and marketing, Human Resources, information technology.
Companies who were early in the market with this license model e.g. Salesforce and with its CRM product line, still generate most of their revenues from it and in a global market which is estimated to be worth $32B by 2019. According to a Gartner Group estimate, SaaS sales in 2010 reached $10 billion and were projected to increase to $75.7B by 2020. The table below gives a breakdown of the estimates of the various ‘Cloud Computing’ sectors including SaaS, now the second largest segment behind Cloud Advertising.
Knowing that SaaS businesses have to protect their bottom line as well as reputation, the risk of being noncompliant is not an option. But just like many other “new” technologies, most states haven’t quite wrapped their hands around whether or not SaaS is taxable in their state.
For example, some states consider SaaS a service. So, if services are generally taxable in the state – such as in Arizona – then SaaS is considered taxable. In most states, where services are not taxable, SaaS also is not taxable. Other states, like Washington, consider SaaS to be an example of tangible software and thus taxable. Just like with anything tax related, each state has made their own rules and laws.
List of states that allows and that does not allow tax to be levied on SaaS Software:
1. Alabama – SaaS is considered a non-taxable service.
2. Alaska – SaaS is taxable in Alaska.
3. Arizona – SaaS is taxable in Arizona.
4. Arkansas – SaaS is non-taxable in Arkansas.
5. California – SaaS is non-taxable in California since there is no transfer of tangible personal property.
6. Colorado – SaaS is non-taxable in Colorado because it is not delivered in a tangible medium.
7. Connecticut – SaaS is taxable in Connecticut. SaaS for personal use is taxed at the full state rate, but SaaS for business use is only taxed at the rate of 1%.
8. Florida – SaaS is non-taxable in Florida when it is only a service transaction and is not accompanied by the transfer of tangible personal property.
9. Georgia – SaaS is considered non-taxable in Georgia, because is not one of the services enumerated as taxable and is not available in tangible media.
10. Hawaii – SaaS is taxable in Hawaii.
11. Idaho – SaaS is non-taxable in Idaho. Remotely accessed computer software is not taxable, and digital subscriptions are not taxable.
12. Illinois – SaaS is considered a non-taxable service.
13. Indiana – SaaS is considered non-taxable in Indiana.
14. Iowa – SaaS is taxable.
15. Kansas – SaaS is non-taxable.
16. Kentucky – SaaS is non-taxable because it isn’t tangible personal property.
17. Louisiana – SaaS for personal use is considered taxable as of May 2011. SaaS for business use is considered non-taxable.
18. Maine – SaaS is considered tangible personal property and is taxable.
19. Maryland – SaaS for business use is non-taxable, while SaaS for personal use is taxable.
20. Massachusetts – SaaS is taxable in Massachusetts when used for personal use, and non-taxable when used for business use.
21. Michigan – SaaS is non-taxable in Michigan.
22. Minnesota – SaaS is non-taxable in Minnesota.
23. Mississippi – SaaS is taxable in Mississippi.
24. Missouri – SaaS is non-taxable in Missouri.
25. Nebraska – SaaS is non-taxable in Nebraska.
26. Nevada – SaaS is taxable for business use in Nevada, and non-taxable for personal use in Nevada.
27. New Jersey – SaaS is non-taxable in New Jersey.
28. New Mexico – SaaS is taxable in New Mexico.
29. New York – SaaS is taxable in New York.
30. North Carolina – SaaS is non-taxable in North Carolina.
31. North Dakota – SaaS is taxable for business use in North Dakota, and non-taxable for personal use in North Dakota.
32. Ohio – SaaS is taxable for business use in Ohio and non-taxable for personal use.
33. Oklahoma – SaaS is non-taxable in Oklahoma.
34. Pennsylvania – SaaS is taxable in Pennsylvania.
35. Rhode Island – SaaS is taxable in Rhode Island.
36. South Carolina – SaaS is considered a taxable service in South Carolina, as are other charges to access a website.
37. South Dakota – SaaS is considered a taxable service in South Dakota, as are other charges to access software.
38. Tennessee – SaaS is taxable in Tennessee.
39. Texas – SaaS is considered part of a data processing service and thus taxable in Texas.
40. Utah – SaaS is taxable in Utah.
41. Vermont – SaaS is non-taxable in Vermont as of July 1, 2015.
42. Virginia – SaaS is non-taxable in Virginia.
43. Washington – SaaS is taxable in Washington since all software, delivered by whatever means, is considered taxable in the state.
44. Washington D.C. – SaaS is considered a taxable service in Washington D.C.
45. West Virginia – SaaS is considered a taxable service in West Virginia.
46. Wisconsin – SaaS is non-taxable in Wisconsin.
47. Wyoming – SaaS is non-taxable in Wyoming, since the purchaser does not have permanent use of the product.
Now that you know whether your SaaS business is taxable or not, the next step is to calculate the tax liability. This depends on the sale amount, method of selling, and where your business is based. In the US, the ‘South Dakota vs. Wayfair’ decision paved the way to a new sales tax era. The state governments can now rule that remote/online sellers are liable for sales tax. This applies only to sellers who have a substantial amount of their total sales or transactions coming from that state. The states now must define a “nexus”. This nexus defines your tax liability, known in some countries as a ‘tax registration threshold’. So SaaS companies may be taxable in some new jurisdictions where they do not have a physical presence but meet the threshold for sales or transactions.
An economic nexus determines your tax liability depending on the sales revenue coming from a particular state. Essentially, a nexus signifies a commercial connection to the state. Each state defines a nexus as having a physical presence or an economic connection. An annual sale of $100,000 is the common threshold. Based on the sales revenue, some states have additional thresholds.
Now that you know how much your tax liability is, just one more step before you start collecting the sales tax. In each state where you have a nexus, you must get a valid US sales tax permit. Failure to do so is considered tax fraud. Most states allow online registration for the permit. If you are old school, you can even do so by snail mail. Alternatively, you can register under the ‘Streamlined Sales Tax (SST) Registration System’. SST was created to simplify sales tax collection. Currently, 24 states adhere to the Streamlined Sales and Use Tax Agreement. Once you have registered, you will get the necessary ID and permit.
You are now ready to collect the sales tax from your customers. Follow these steps:
Step 1: Check your buyer’s location.
Step 2: Calculate the tax rate for the location based on the state law.
Step 3: Check for all applicable tax rates. There is a possibility of different tax rates for a county, city, or other local sales.
These steps may be deceptively simple. It’s advisable to always go through the tax authority websites of each state to avoid getting tangled in any of the complexities.
If you are going through all that trouble to calculate and collect taxes, it only makes sense to also maintain accurate records and documentation for it. That includes:
1. Tax-compliant invoices and receipts
In the event of an audit, these include all the information relevant to the tax authorities, such as details of the buyer, items bought, unique invoice reference number, date, and the sales tax breakup. Also, if you are filing any tax deductions, tax receipts are required as documentation.
2. Refunds and credit notes
In case of full or partial refunds, you must issue a credit note for documenting the refund. This will help you avoid taxes that you do not owe anymore. It is advised to keep secure digital records for several years. This will help you easily produce any records during audits.
You can file sales tax returns separately for each state on their Department of Revenue website. Ensure that you note:
1. Frequency of returns
2. Deadlines for filing the returns
3. Breakdown of the tax reporting (county, city, locality-wise)
You still must file returns, even if you did not collect any taxes in a jurisdiction where you have a tax permit. In such cases, you must file a ‘zero taxes’ return.
SaaS Sales Tax Checklist:
1. Understand how your business is categorized under the sales tax law
2. Understand the state-wise sales rules
3. Find states where you have an economic nexus
4. Register for a sales tax permit
5. Calculate and collect the sales tax
6. Maintain tax-compliant documents such as invoices and credit notes
7. File sales tax returns
8. Maintain accurate books accounting for the sales tax
Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath