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Build Your SaaS

Nobody wants to talk about this (SaaS sales tax)

49 min episode · 2 min read
·
Nobody Wants

Episode

49 min

Read time

2 min

Topics

Startups, Sales & Revenue, Economics & Policy

AI-Generated Summary

Key Takeaways

  • Compliance costs exceed value: Switching to merchant of record like Paddle costs 5% plus 50¢ per transaction versus Stripe's 2.9% plus 30¢, meaning businesses pay significantly higher fees solely to handle government tax collection with no operational benefit.
  • Government externalization problem: Sales tax is not a business tax but a consumer tax where governments outsource calculation, collection, remittance, and record-keeping to small businesses instead of requiring payment processors like Stripe to handle compliance for all merchants automatically.
  • UK pricing strategy: Sales tax compliance experts recommend UK-based SaaS companies absorb the 20% VAT for consumer sales rather than adding it to prices, effectively surrendering 20% of revenue margin to maintain consistent pricing across markets and comply with tax-inclusive pricing requirements.
  • Saskatchewan threshold trap: Registration requirements trigger after a single transaction in certain jurisdictions like Saskatchewan, forcing global SaaS companies with four-person teams to manually register, track exemptions, and remit taxes quarterly for potentially just $5 in tax revenue per region.

What It Covers

Transistor founders discuss the complexity and cost of SaaS sales tax compliance across global jurisdictions, revealing their $10,000 failed attempt with a compliance vendor and exploring alternatives to collecting tax in 100 regions.

Key Questions Answered

  • Compliance costs exceed value: Switching to merchant of record like Paddle costs 5% plus 50¢ per transaction versus Stripe's 2.9% plus 30¢, meaning businesses pay significantly higher fees solely to handle government tax collection with no operational benefit.
  • Government externalization problem: Sales tax is not a business tax but a consumer tax where governments outsource calculation, collection, remittance, and record-keeping to small businesses instead of requiring payment processors like Stripe to handle compliance for all merchants automatically.
  • UK pricing strategy: Sales tax compliance experts recommend UK-based SaaS companies absorb the 20% VAT for consumer sales rather than adding it to prices, effectively surrendering 20% of revenue margin to maintain consistent pricing across markets and comply with tax-inclusive pricing requirements.
  • Saskatchewan threshold trap: Registration requirements trigger after a single transaction in certain jurisdictions like Saskatchewan, forcing global SaaS companies with four-person teams to manually register, track exemptions, and remit taxes quarterly for potentially just $5 in tax revenue per region.

Notable Moment

Basecamp revealed they paid several million dollars in back sales tax they never collected because they operated for years without proper compliance, only discovering the liability themselves before any government audit forced the issue.

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Episode Transcript

This podcast is hosted by transistor dot f m. Hey, everyone. Welcome to Build Your SaaS. This is the behind the scenes story of building a web app in 2023. I'm John Buda, a software engineer. And I'm Justin Jackson. So happy to be back with our first episode of 2023. I do product and marketing, and thanks for following along as we continue to build transistor dot f m. It's been a while since we recorded. Yeah. The last episode was three or four months ago, I think, with the whole team after our team retreat. Yeah. What are we gonna do about this? Are we gonna we do we just need to say, you know what? We're gonna jump back on the horse? Or I I I'm always confused what to do with this show. Yeah. I think we should yeah. I think we should try to do it at least twice a month. Okay. Listener, if you're still here with us, first of all hey. Thanks. We're on Mastodon now. You can reach out on Mastodon. Say hi. I'm still on Twitter. You can still say hi there. Are you still on Mastodon, John? Are you are you are you Yeah. I I poke around. I haven't really used it much, but, yeah, I'm not Okay. Well, go follow John Buddha on Mastodon while he's still I'm still on Twitter. Public. I deleted all of my history and basically don't use it. Before that before Elon shut off shuts off the API, so you can't delete your tweets anymore. That's probably a whole podcast too. But It is. I I actually think I mean, we could record more often because I think now that once we got on the pre call, I was like, man, there's actually some stuff to talk about. Plus, I think the nice thing about podcasting, which we've said from the beginning, is that it it forced you and I to get on a call together. And I think it's just so easy, especially at this stage, for you and I to not touch base even though we should be touching base. And we keep we keep saying that, and we never do. Yeah. Right. I have other friends who run a company, and they're, like, they hop on a call, I think, once a week and just, like, do a walk and talk for, like, an hour. We should do more walk and talks too. I have that. It's gotta warm up here soon, but sooner. Yeah. First I mean, I'm walking every morning, so I'm I'm I'm out. One thing that actually we did we did implement that I think has been good is we have this once a month meeting where we just go through our books. But that's been a nice one because we end up talking about other stuff. And even if it's just a fifteen minute call to, you know, clean up our accounting, do some admin …

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Books, tools, and gear mentioned in this episode

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Tools

  • by Stripe

    Switching to merchant of record like Paddle costs 5% plus 50¢ per transaction versus Stripe's 2.9% plus 30¢, meaning businesses pay significantly higher fees solely to handle government tax collection with no operational benefit.
  • by Stripe

    SaaS Sales Tax, Tax Compliance, Stripe Tax, VAT
  • by Paddle

    Switching to merchant of record like Paddle costs 5% plus 50¢ per transaction versus Stripe's 2.9% plus 30¢, meaning businesses pay significantly higher fees solely to handle government tax collection.

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