Year-end SaaS sales tax review: 2023

2023 saw governments around the world continue expanding their efforts to capture revenue from the rapidly growing software sector.

This was the first year that all 45 states that collect sales tax had economic nexus laws in effect, allowing them to require sales tax compliance from remote as well as local businesses. Globally, governments followed the same trend, with around 100 countries now taxing nonresident sales of digital products.

Authorities also stepped up enforcement of existing tax regulations, using tools like audits, expanded definitions of taxability, and new reporting requirements to bring more digital businesses into compliance.

Overall, governments are working aggressively to eliminate the possibility that noncompliant businesses can operate in their jurisdictions—making it critical for any business selling across borders in 2024 to check compliance off the list, or risk revenue loss.

Read on to get the latest sales tax and VAT updates. And if you’re looking for a partner in navigating the SaaS tax landscape, get in touch with our team.

The bottom line

Here are the top changes you need to know from 2023, and the implications for SaaS companies selling across state or international borders in 2024:

1. As of January 1, 2024, the state of Georgia will tax sales of digital goods. This taxability change accompanies over 1,300 tax rate changes made in 2023, across 23 US states.
2. Seven new countries extended VAT requirements to nonresident businesses, making digital sales into those countries taxable according to local regulations.
3. The EU introduced new reporting requirements for cross-border payments, aimed at identifying noncompliant businesses. The first reporting date is January 1, 2024, and increased audit activity is expected to follow.
4. International governments pursued noncompliant businesses via audits and legal action, with notable examples in Denmark and Italy, which went after Meta for some $925 million in uncollected VAT.
5. Local governments in the US moved to streamline their administrative processes, with significant updates in Colorado, Louisiana, and South Dakota. These changes aim to alleviate some of the burden of compliance for businesses selling into those jurisdictions.

Line items

1. Georgia taxes digital goods, plus 1,300 rate changes in the US

The brief: Georgia’s new law adds digital goods and services to the list of taxable products in the state as of January 1, 2024. The update extends the state’s sales tax laws to a wide range of digital products like e-books and video games, though SaaS and streaming services are excluded.

State and local governments also adjusted their tax rates at a continued high pace this year, with 23 states making a total of over 1,300 tax rate changes in 2023.

The backstory: In May, Georgia passed bill S.B. 56, applying sales tax to digital goods and services. The state previously only taxed physical goods, and is the latest state to successfully capture some of the revenue generated by sales of digital products to local customers. Georgia’s economic and physical nexus laws mean these requirements apply to some remote businesses operating in the state, in addition to companies local to Georgia.

Georgia joins 36 other US states that tax digital goods, while 23 currently tax SaaS. But definitions vary across those states, as well as many local US jurisdictions that set their own taxabilities.

Raising sales tax rates is another way state and local governments continued efforts to capture more revenue from business activity. In 2023, over 1,300 rate changes were made across 23 US states, many of those increases.

The bottom line: US tax authorities are moving quickly to tax new digital products as they hit the market. Businesses selling software or other digital products should stay abreast of changing regulations to remain in compliance in 2024.

2. Egypt and 6 other countries extend VAT guidelines to nonresidents

The brief: Egypt clarified the processes for nonresident businesses to comply with their VAT regulations this year, effectively allowing those companies to get compliant for the first time.

Nonresident VAT requirements went into effect for the first time in 2023 for Benin, Bosnia and Herzegovina, the Dominican Republic, Palau, Senegal, and Suriname.

The backstory: In 2015, the EU extended its VAT regulations to foreign sellers, and each year since has seen a number of countries follow suit. 2023 was no exception, with the total number of countries applying VAT to nonresidents now reaching around 100.

New regulations went into effect in Bosnia and Herzegovina, the Dominican Republic, Palau, and Suriname in January, and in Benin in October.

In March, Egypt published compliance guidelines for nonresident service providers selling into the country. The new guidelines apply to a range of products, including software and other digital goods, and allow businesses with customers in Egypt to comply with the country’s existing VAT laws.

The bottom line: Over 100 countries now tax nonresident sales of digital products like software. In some cases, there is no threshold for compliance, meaning the first sale into a country can put a company on the hook for collecting VAT. It’s critical for businesses planning to operate internationally in 2024 to review their liabilities and make a plan for global compliance.

3. EU introduces new reporting rules aimed at identifying noncompliant foreign sellers

The brief: In 2024, the EU’s new payment reporting requirements go into effect, and the first deadline is in January. The new rules require payment providers to report information on foreign entities receiving more than 25 cross-border payments per quarter.

The backstory: As it approaches the 10-year anniversary of implementing nonresident VAT guidelines, the EU is looking for ways to close the VAT gap on noncompliant businesses. Data collected under the new reporting requirements will be stored in a database called the Central Electronic System of Payment Information (CESOP), and shared via a network called Eurofisc to identify companies doing business in the EU that aren’t VAT compliant.

Increased audits of nonresident digital businesses are likely to follow the January deadline, with noncompliant companies at risk of penalties, back taxes, interest, and criminal proceedings.

The bottom line: With the EU introducing new ways to identify noncompliant businesses, proactive VAT compliance will be key for companies selling into the EU in 2024. Even compliant businesses should verify their VAT data matches incoming payment info reported to tax authorities to avoid potential audits.

4. Italy says Meta owes $925 million in VAT, and Denmark steps up audits

The brief: Facebook parent company Meta is being investigated by Italian authorities, who say the platform’s free user signups might be subject to VAT. On the line is a potential €870 million in uncollected VAT and a precedent for other software companies selling internationally.

In another effort to claim more tax revenue from digital businesses, Denmark increased VAT audits of nonresident sellers of digital goods.

The backstory: Italian prosecutors opened their investigation in February, aiming to determine whether free Facebook user signups are subject to VAT. This is based on the argument that Meta grants free access granted to users in exchange for their personal data, which contributes directly to the company’s revenue.

Tax experts are mixed on the case, which has been ongoing and might resolve sometime in 2024. Whatever the outcome, it could have significant implications for other software companies with similar business models.

In August, observers noted an increase in VAT audits of nonresident sellers by the Danish Tax Agency. As in other EU member countries, Danish VAT regulations require nonresident digital businesses to register and charge VAT on B2C sales. Because Denmark shares taxpayer data across the EU, companies found to be noncompliant could face audits in other countries as well.

The bottom line: Tax authorities are using a wide range of methods to ensure VAT compliance, a trend that’s likely to increase heading into 2024. Businesses operating globally should review potential liabilities, and stay aware of new applications of local tax laws to software and other digital products.

5. Colorado streamlines home-rule administration, while some states adjust economic nexus thresholds

The brief: Colorado took a major step in streamlining the administrative burden of the state’s home-rule jurisdictions, by eliminating the requirement for businesses to register locally with cities and counties for sales tax purposes.

Louisiana and South Dakota both adjusted their economic nexus thresholds to remove sales tax obligations for businesses with 200 in-state transactions annually. Both states still require companies with at least $100,000 in in-state sales annually to register and collect sales tax, but the move could let some smaller remote businesses off the hook for sales tax compliance.

The backstory: As of January, all 50 US states have economic nexus laws in place extending their sales tax laws to remote sellers. Several states additionally allow cities and counties to operate as home-rule jurisdictions, setting their own—sometimes conflicting—sales tax rules. This creates a complex web of requirements for businesses selling across state lines.

In July, Colorado passed a law prohibiting local jurisdictions from requiring remote businesses to register locally to collect sales tax. This is a big step from the US state with the most complicated sales tax situation for SaaS (while Alabama has 400+ local jurisdictions that manage their own sales tax rules, the state does not currently tax software).

Over 70 local cities and counties in Colorado set their own sales tax rules, many requiring sales tax on SaaS despite it not being taxable at the state level. While companies with customers in Colorado still need to comply with local tax laws, the new state law works toward lowering the administrative burden on those businesses.

Other states moved to release some smaller businesses from sales tax requirements altogether, with South Dakota and Louisiana dropping their transaction thresholds for economic nexus in July and August, respectively. 

Both states still have a sales threshold of $100,000 annually, but the adjustment will allow some companies with smaller sales volume into those states to avoid compliance without penalty.

The bottom line: While the past five years have seen US states significantly expand their sales tax laws, these developments show states are making adjustments to give some sellers relief. Businesses can expect this trend to continue in 2024, but should remain vigilant in tracking sales tax liability against state, county, and city regulations to ensure appropriate compliance.

Forecasting

In 2024, governments around the world will continue evolving their tax legislation to keep pace with digital innovation. Here are some of the top stories to watch as we head into the new year:

• With only 23 US states now taxing SaaS, others are likely to expand their taxability in 2024. State legislatures will be back in session come January, and states like Mississippi who’ve previously attempted to tax SaaS and other digital products are expected to consider it again early next year.
  
• Globally, 2023 saw a major expansion of requirements for e-invoicing and real-time reporting, as well as new information reporting requirements like DAC7, DAC8, and CESOP. In 2024, expect to see efforts continue to close the VAT compliance gap.
  
• In 2023, the EU issued initial guidance suggesting NFTs could be considered taxable at some point in the future. While it’s not clear if or when the EU will tax NFTs, businesses selling products in new categories should be aware of changing global regulations as more governments move to tax those products.