Sales Tax

Sales tax is a consumption tax imposed by a particular city, county, state, or country on the sale of goods and services within its jurisdiction.

It is designed to tax final consumers rather than businesses and is usually calculated as a percentage of the sale price.

It is generally the seller's responsibility (no matter where they are located) to collect sales tax from the buyer at the point of sale and remit the tax to the authorities.

Sales tax can become incredibly complicated as different jurisdictions charge different rates.

GST and VAT are similar to sales tax.

For example, Singapore has 9% GST, India has 18% GST, the UK has 20% VAT, and the UAE has 5% VAT on most goods and services.

Most states in the US nowadays have sales tax, and rates differ from state to state.

Sales tax on digital goods and services is a wild west at the moment.

Lawmakers across the world are still figuring out how to tax the transfer of goods and services over the internet.

Things are continuously evolving and laws are changing worldwide.

Compliance in every jurisdiction is nearly impossible.

There are still years to go until the dust finally settles and some uniformity and consensus emerge worldwide on this topic.

This makes it increasingly difficult to keep up with changing regulations.

When you sell digital products to customers from all over the globe and dozens of jurisdictions, collecting and remitting sales tax can become a nightmare—registering, collecting, filing monthly or quarterly reports, and keeping up with regulatory changes.

Depending on what you sell, the sales tax rate could be different: one-time purchasable software and software-as-a-service may not be taxed at the same rate.

Some tax jurisdictions, such as the UK, India, the UAE, and many others, require upfront registration for international companies, and some set a certain revenue amount or number of transactions after which you must register for sales tax in that jurisdiction.

Whether or not to collect sales tax on digital products plagues many businesses: some don't collect sales tax at all when selling digital products, and some only collect from a few jurisdictions where they have the most sales. That's why sometimes you see a tax amount on an invoice for a SaaS subscription and sometimes you don't.

US States

Sales tax within the US varies by state, city, county, and more; on top of that, there are often local taxes specific to a jurisdiction.

Most states have sales tax in place, with a few exceptions.

Most states have economic nexus laws requiring businesses to register to collect and remit sales tax. Nexus is formed when a business reaches a threshold of a certain revenue and/or number of transactions in the state.

For example, Nevada has a threshold of $100,000 in revenue or 200 transactions for businesses. After that, any business must register for a sales tax permit, collect, and remit sales tax.

It is illegal in most states to collect sales tax from customers before obtaining a sales tax permit.

Merchant of Record

The Merchant of Record (MoR) is the entity that holds legal responsibility for processing customer payments on behalf of a business.

Each MoR is different, but in general, a MoR cuts through bureaucratic red tape and handles payments, refunds, chargebacks, and collecting and remitting sales taxes.

If you've purchased an in-app item through Google Play, you'll see Google takes care of those points on behalf of the app developer; in this case, Google acts as the Merchant of Record.

You can choose to onboard with a MoR and avoid the headache of sales tax.

However, there are two big downsides to using a MoR:

• The MoR's volume determines revenue thresholds, not yours. This means customers might have to pay sales tax when buying through the MoR because the MoR has surpassed a revenue threshold in a jurisdiction, even if you haven't.
• You can't deduct input tax credit for jurisdictions with GST/VAT systems, since the tax ID used to collect sales tax belongs to the MoR, not you.

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Disclaimer: All content here is for general informational purposes only and not intended as legal, tax, or financial advice. Always consult a qualified professional before taking any action. Use at your own risk; the author assumes no liability.