One of the more confusing subjects for me as a startup-founder was payment collection. How do I charge my customers? What is the difference between services like Stripe, Chargebee, Chargify, Paddle, and Fastspring?
Disclaimer: This article will sound like an advertisement for Paddle and Fastspring. It is not. I am not getting paid to write this. I am writing from my own experience and my own research. I think Stripe is a great service. But if you are a tiny, bootstrapped startup with customers from different countries, you should think long and hard if Stripe is the right service for you.
Sales Tax, VAT & co
I am surprised how many founders don’t have a basic understanding of taxes. Then again, taxes are a very boring and very complicated topic. They differ from country to country, and even within countries.
For our purpose, we only need to focus on VAT, which is short for value added tax. From my understanding, this is the most general term for the tax that one pays when buying goods or services. (Some countries distinguish this from sales tax, which is the tax that the final consumer pays on a product or service. I think of sales tax as a special case of VAT. At least for the purpose of deciding on a payment service. But I am not a tax expert.)
As a business, you are basically required to collect VAT from your customers (by including it in the final price they pay you), and pay the VAT you collected to the tax office. Let’s say the relevant VAT is 19%. If you want to make 100 EUR per customer, you will have to charge them 119 EUR, because for every 1 EUR you charge your customers, you will need to pay 19% to the tax office. (There are exceptions in many countries if your business is small enough, but that is not relevant here.)
So, here are the steps that you need to perform in this simple example with VAT rate of 19%:
- add the relevant tax to your price (in this example: 100 EUR + 19 EUR tax = 119 EUR)
- collect the 119 EUR from the customer
- declare and pay 19 EUR in taxes to your tax office
In practice, you do steps 1 and 2 for every invoice, but step 3 is something you do on a monthly, quarterly or yearly basis in most countries.
Ok, that sounds simple enough, right? I live in Germany, where the general VAT tax rate is 19%, so I simply add 19% to all prices. Where is problem?
It’s not that simple
There is no problem, if you intend to only sell to consumers and companies in your home country. But you are building a Saas (Software as a service), so you probably plan on selling to customers all over the world, right? Suddenly this gets complicated. Much more complicated.
Because it is so complicated, I will need to make a couple of assumptions, in order to not get completely lost in the weeds. Here are my assumptions:
- you are building a Saas, not a marketplace
- your customers pay you for using the Saas
- you will be selling to both consumers and businesses from different countries
So what do you have to do now? The three steps from above require two additional steps:
- figure out the relevant VAT rate for the customer, depending on their country of origin and possibly other factors
- figure out if and how you need to handle VAT for the customers country, in many cases that means that you need to register with the tax office of the customer’s country of origin
- add the relevant tax to your price (in this example: 100 EUR + ?? EUR tax = 1?? EUR)
- collect the 1?? EUR from the customer
- declare and pay ?? EUR in taxes to the relevant tax office
Wait, what? Step 2 sounds like a lot of work! Registering with the tax office of the customer’s country?
Of course, you can outsource step 2 and 5 to your tax advisor. They will be happy to charge you for their services. If you have a profitable Saas business, then those extra expenses shouldn’t be a problem. But if you are just starting out, this can become a problem.
You will still need to make sure that you apply the correct VAT rate to every price for every customer from every country.
Doesn’t my payment provider do that for me?
Many budding entrepreneurs assume that payment providers like Stripe will do all of this for you. But they do not.
Let’s take our five steps from above and let’s see what a payment provider like Stripe will do for you:
- (Stripe tax) figure out the relevant VAT rate for the customer, depending on their country of origin and possibly other factors
- (you) figure out if and how you need to handle VAT for the customers country, in many cases that means that you need to register with the tax office of the customer’s country of origin
- (you) add the relevant tax to your price (in this example: 100 EUR + ?? EUR tax = 1?? EUR)
- (Stripe) collect the 1?? EUR from the customer
- (you) declare and pay ?? EUR in taxes to the relevant tax office
Originally, Stripe only helped you with step 4, collection the money. Everything else was still your responsibility. When doing research for this article I noticed that Strip now offers a new service called Stripe tax, for which they charge you an additional fee.
Isn’t there in easier way?
Yes, but it will cost you, as well. There are other types of service providers that will take care of almost all the steps for you. The only ones that I could ever find during my research are Paddle and Fastspring.
Both Paddle and Fastspring will take care of everything. They do that by actually selling your service to your customers. So, legally, the customer don’t buy from you, they buy from Paddle / Fastspring. Sounds a bit scary and confusing at first. But it’s a common business practice. (I recently ordered a headphone from the official Sennheiser store and was surprised to find out that they were using Fastspring.)
When I build my next startup, I will be using either Paddle or Fastspring. I don’t want to deal with the headache of VAT for different countries. And I don’t want to pay a tax advisor to do it for me. If I were selling a high-priced service or product to a few large customers, in a few countries, then I might change my mind. But that’s not really a market I want to be targeting.
P.S.: I mentioned Chargeify and Chargebee in the beginning but did not mention them later. The reason is, that, in a sense, they are even more specialized than Stripe. If you want to use one of them, you will always need to pay for something like Stripe in addition to their service. And that will still only cover step 4 in our little 5-step-example.