Tax Compliance Complicates Software Subscription Business

Tax compliance has never been a simple issue for businesses. There are changing federal, state and local codes — and, of course, there are changes brought on by digital business models. One of those evolving models is subscription commerce, especially for software. Software used to be purchased in a single big buy — a “one and done” purchase made every few years. Enter Software as a Service (SaaS), and even tax codes have been playing catch-up with the subscription business.

And for all the good things subscription commerce offers software firms, like more recurring revenue, ensuring that subscription models and their payment processes are successful under the new paradigm can become a taxing burden on companies. It’s a burden that SaaS eCommerce platform FastSpring has addressed aggressively.

“In the United States, for example, there are 34 states that tax downloadable software, whereas there are only 20 states that tax SaaS products,” FastSpring Chief Financial Officer Mark Lambert told PYMNTS in a recent conversation. “As the marketplace shifts toward a more SaaS-based strategy, you can be sure that we’re going to see a shift in tax guidance as well.”

Lambert noted that subscription-based companies have no choice but to respond. He recommends using a platform partner to take it on, rather than trying to manage it themselves internally.

A Complicated Field

If one takes a look at the taxation situation worldwide, they’ll see constant flux, Lambert said. Here in the U.S., the Supreme Court’s 2018 Wayfair ruling changed how companies approach sales tax — and in the EU, the list of changes is even more extensive.

“Taxation has never been straightforward, and it’s really tough to stay on top of all the changes in real-time,” Lambert said. “That said, there’s no rest — it’s the taxpayer’s responsibility to keep up with the changes and follow the laws.”

Firms face the choice of either trying to build a team in-house or seeking assistance externally. First, building an entire team of tax professionals to keep track of the daily changes in the system would be prohibitively expensive for most firms. And even if they could afford it, said Lambert, there is no guarantee they’d be able to find it, as there is a scarcity of experts who can do this work — and they are hard to identify, recruit and retain. While we tend to assume that international tax compliance is the arena of massive businesses with dedicated tax teams, he said, the explosion of eCommerce seen in the last year or so has made that idea fairly outdated.

“These eCommerce businesses are no longer selling goods and services to a single country,” Lambert noted. “Customers come from everywhere — it’s not just big companies that are going international; small companies are as well. So tax compliance is really everybody’s concern now.”

And platforms like FastSpring provide a way for companies to take that concern off their own plates and hand it off to experts trained to deal with those issues. And firms are increasingly realizing that this highly technical back-office work — especially in the era of remote work — is better outsourced to a dedicated platform.

Building For A Changing World 

Software sales is a much different industry than it ever has been, Lambert said. An increasing number of software companies are thinking differently about how they sell their products and are looking to broaden their efforts. Firms that have historically relied on sales teams are looking into eCommerce, and vice versa. The trend is for businesses to sell their products through multiple channels, as opposed to relying on one preferred channel.

That has given birth to what Lambert calls a “hybrid approach,” moving into areas like representative-assisted eCommerce. However, despite the growing interest in expanded horizons, many technology platforms have not kept up. That’s what inspired FastSpring’s acquisition of SalesRight, a SaaS solution that provides quoting and pricing tools for software sales teams. SalesRight, according to Lambert, will help FastSpring tap into the team approach to software sales, which hasn’t been a central part of its approach.

“We think it strengthens our overall product offering considerably. Together, we can support the next generation of software selling marketplaces,” he said.

The software world is changing, Lambert noted, as firms are thinking differently about how they are selling — and how they are moving what they are selling. That creates big opportunities for firms — but it also creates the need for new and better technical support across the board, lest those new opportunities turn into headaches and burdens for those who pursue them.