A Primer on Sales Tax for SaaS and E-commerce

by | Sep 18, 2015 | System Integration

Two submarine sandwiches

Every so often, the topic of sales tax for SaaS or e-commerce comes up on our Community forum. People wonder… Why doesn’t Kill Bill have a built-in tax module? How do existing users handle it?

We actually know some companies that have implemented their own tax plugin. If a business has very few jurisdictions and a limited product catalog, it might work.

However, for the vast majority of cases, we recommend simply outsourcing tax calculations for your e-commerce, SaaS, or online business. Why? Because in practice, determining the tax assessment is a really hard problem.

How complicated can sales tax be?

In the U.S., the state of New York imposes sales tax on sandwiches of every kind that are prepared and ready to be eaten. But what does New York state consider a sandwich?

“A sandwich can be as simple as a buttered bagel or roll, or as elaborate as a six-foot, toasted submarine sandwich.” –Tax Bulletin ST-835

Surprisingly, the New York state definition of “sandwich” includes burritos, but not tacos! And if you ask your plain bagel to be sliced, you’ve just transformed a grocery item into a sandwich, and New York taxes it 8.875% more.

NPR’s Planet Money ran a great story on the topic in 2014 (Episode 554: How The Burrito Became A Sandwich, transcript here). Check it out for a fun history of the sales tax and incredible anecdotes, including how a pizza place rebranded itself as a bakery and how a food delivery service started serving unassembled wraps, both just to avoid paying taxes.

What to consider when calculating sales tax

Granted, these edge cases may seem remote if you have an e-commerce, SaaS, or online business. However, local tax laws could still impact your business. To calculate taxes, you must consider these factors:

  • Customer—The person may be exempt in some jurisdictions.
  • Product—Is it fully taxable, half-taxable, exempt, etc.?
  • Transaction—Depending on the location, state and county taxes may apply.

Applying the right amount of tax for each invoice item and remaining compliant is truly complicated. That’s why we decided to not write any tax module in Kill Bill. Instead, we provide turn-key integrations for third-party solutions.

One such third-party solution is Avalara AvaTax. They provide a great Sales & Use Tax compliance For Dummies e-book. It provides details of the sales tax landscape, filings, audits, and compliance solutions. And if you want to integrate AvaTax with Kill Bill, make sure to check-out our plugin.

Here’s another blog post on Avalara as a Kill Bill certified integration.

Related Articles