Sales tax and a new billing platform

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The short version: If your government requires us to collect sales tax from you, we will start doing that soon.

When we started Less Annoying CRM, the idea of paying a monthly subscription for web-based software was still new. This model is called “software as a service” (or “SaaS”) and at the time, it wasn’t really clear whether it should be treated as a product or a service. As a result, no one really knew whether sales tax should be applied when paying for SaaS products.

Now that SaaS is mainstream, many governments have started clarifying that local sales taxes should be applied. This is now the policy in many U.S. states as well as many different countries. These requirements don’t generally apply to very small SaaS companies, but once a company like us hits a certain scale, we have to start collecting sales tax from our customers and pay it to their respective governments on their behalf.

The problem is that registering with a gazillion different states and countries is nearly impossible for a company our size. We’re now big enough that we need to collect sales tax, but we’re not big enough to realistically be able to do all the admin work required to pull that off.

For that reason, we’ve decided to switch to a company called Paddle to handle our billing from now on. There are three main things that will change as a result of this:

  • If you live in an area that requires sales tax to be paid on SaaS products, Paddle will start collecting that from you as soon as we finish migrating to their platform.
  • Unlike our former billing provider, Paddle is a “merchant of record” which means you’ll see their name (in addition to ours) on your credit card statements and billing emails.
  • We are forced to change a handful of minor billing practices because Paddle doesn’t support the exact policies we had before.

To be perfectly honest, this is annoying. We obviously try to be less annoying, but what’s even more important is that we can continue to exist and serve you for years to come. Ignoring tax laws would create too much risk for our business which isn’t good for us or for you, and this is the only way we could figure out to be compliant.

Read on for more details on each of these changes…

Sales tax

Sales tax (also referred to as VAT) is a tax that some governments require customers pay when buying products within their jurisdictions. To be clear, this is not a tax paid by the company selling the product (i.e. it’s not LACRM that is expected to pay sales tax, it’s you, the customer). In theory, you should be paying sales tax manually if vendors don’t collect it from you, but practically speaking, not many people actually do that. The thing that’s changed is that now we’re big enough that we’re required to collect this tax from you and pay it to your government instead of counting on you to pay it separately.

If you live in an area that requires us to collect sales tax from you, we’re sorry, we know that this is an added annoyance, and it will cause your price to increase. If it’s any consolation, it’s also costing us quite a bit of extra money. Paddle is going to cost us much more than our previous billing provider, and we’ve invested countless hours of developer time into making this change. This isn’t the type of thing we want to be spending our time or money on, but it was unavoidable.

Merchant of record

As mentioned above, it’s not practical for a company our size to register with a bunch of different states and countries, understand their specific tax laws, collect the correct amount from our customers, and “remit” (which is when we pay the taxes on your behalf) the taxes to the government. There are countless companies like us that are big enough to be required to handle sales tax, but small enough that there’s no reasonable way to actually do it.

That’s where Paddle comes in. They’re a “merchant of record” which means that they sit between you (the customer) and us (the provider of the product). Instead of you paying us directly, you’re actually paying Paddle. This is why your billing emails and credit card statements will show Paddle’s name in addition to the LACRM brand.

Paddle offers this service to a bunch of different companies like us, and because they’re technically the ones getting paid, they can handle taxes for all of their customers at once. So instead of thousands of small businesses like us figuring out taxes individually, we all use Paddle, and they handle tax compliance. After the taxes are handled, Paddle pays us whatever is left (minus their fee).

You’ve probably encountered this model before. If you buy software from the Apple App Store or the Google Play Store, you’re actually buying from Apple or Google directly, and then they pay the app developers. This way, the app developers don’t have to worry about taxes or a number of other things.

This might make our billing experience a bit less intuitive in minor ways. For example, if you call the number on your credit card statement trying to reach us, you’ll actually reach Paddle. Again, this isn’t ideal, but it’s the only way we could figure out to handle tax compliance.

Minor changes to billing policies

Paddle’s system is quite a bit more structured than our old billing provider. Before, we could collect your payment info and charge you whenever we wanted, so we had total control over the entire process. With Paddle, they handle the subscription logic, so we don’t get to decide exactly how every situation should be handled. This mostly won’t matter unless you run into some unusual situations such as…

Things that will get better

  • Paddle works with more payment options, including PayPal. In the past, if you wanted to pay via PayPal you had to pay annually, and the process was very manual. Going forward, you can do a normal monthly subscription via PayPal.
  • Our old billing system didn’t really support annual payments. Paddle handles this natively, so you’ll be able to pay annually if you prefer. Note: We don’t offer a discount for annual (we believe in everyone paying the same price) so you should only do this if it’s more convenient for you.
  • If you close your account, previously you had to contact us to re-open it. With Paddle, you’ll be able to log in and pay to reactivate your account within a year after closing it (after that we permanently delete all of the data).

Things that will be…different (not really better or worse)

  • If you add or remove users, Paddle will charge or credit a prorated amount to handle the rest of the month. Previously we just charged you the new amount the next time you paid, but we didn’t correct the payment for the current month.
  • Note: For monthly plans, prorated charges won’t be paid until your next bill (so it won’t create a payment mid-month). But that doesn’t work for annual plans since it might be a long time before your next payment, so adding users while on an annual plan will create an immediate charge. Again, this is just how Paddle works.
  • If you ask for a refund, Paddle will be the company granting it, not us. We get to set the policy (which will be the same as our old policy: We’ll give a one-month refund, no questions asked) but we aren’t able to make exceptions anymore.

Thing that will be worse

  • There are no more pre-payments aside from the annual payment option. Most people probably don’t even know this was an option before, but we previously allowed you to pay any amount you wanted, and we’d apply that as a credit on your account which would gradually get used up each month. Paddle unfortunately doesn’t support this option, so you must either pay monthly or annually.

For some people (especially people who like using PayPal or paying annually) this will be an improvement. For most people this will be neutral or a downgrade. If you’re frustrated by this, I hear you, and I share your frustration. This change will cost us tens of thousands of dollars per year, and it took a significant amount of developer time which could have been spent on other things. This is the cost of doing business online, across borders.

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