Billing Compliance

What is billing compliance?

Billing compliance is all the complicated legal, financial, and billing steps that subscription services and SaaS businesses must take to get recurring subscription payments. Generally Accepted Accounting Principles (GAAP) say that these businesses must accurately bill their customers on time, follow company and government payment rules and policies, and correctly identify and report revenue.

The subscription business strategy is very flexible because it can be used to make a lot of money. Because they know where their regular payments are coming from, subscription businesses don’t have to work as hard to get new customers. Instead, they can focus on things that will help them grow, like making new products and entering new markets.

This is even more true for hosted software as a service (SaaS) and streaming systems. Software can be made just once and then kept up-to-date and managed forever. Adding more people doesn’t require internal planning like traditional service-based businesses, which need more team members, office space, and other resources to grow.

However, unmatched flexibility comes with a cost. If these companies add new subscribers and make their sites more valuable, the accounting gets ten times more complicated.

Synonyms

• Accounting Compliance
• SaaS billing compliance
• Subscription billing compliance
• SaaS tax compliance

Why subscription businesses need to make sure their billing is correct

Some things are more complex with recurring billing than with one-time billing. Following the rules is essential for all kinds of businesses. But it’s much easier to keep track of one-time payments because customers pay for each item or service simultaneously.

Companies that offer subscriptions have to charge for long-term services and keep track of payments over time. For a new business with 100 subscribers, it might be easy to keep track of taxes, discounts, refunds, cancellations, payment schedules (monthly vs. yearly), changes in currency, foreign rules, and other things. But it’s the most challenging puzzle for a SaaS company with thousands of users.

Accuracy in Money

“How much did the business grow last quarter?”

“How are we keeping our current subscribers and getting more from them to bring in more money?”

“What should we do to keep customers coming back?”

When these questions are asked in the boardroom, it gets quiet because no one has accurate financial information.

Billing data, like customer payments, revenue per user, and subscription lifetime, holds all the answers. If you don’t handle it properly, you’ll make dire revenue predictions and business choices at best.

Being accurate with money is also very important when it’s tax time. Every year, the IRS checks the books of tens of thousands of businesses and is unafraid to go after those whose books aren’t entirely correct.

By “compliant billing practices,” we mean those showing the company’s financial state.

Openness about money

Instead, correct financial information helps a business plan for future cash flow, give correct income reports, and predict customer loss. These tips save you much time and money on taxes and are necessary for making intelligent strategic decisions.

Better partnerships with stakeholders, investors, and the Board are a long-term benefit of financial transparency through billing compliance. For businesses that want to get new capital, it’s also a faster way to get there.

Compliance with Regulations

Every time a subscription site adds a new user, there is a chance that security and privacy laws will be broken. Not following the rules is a big problem because it could lead to:

• Having to pay hefty fines if they fail.
• Not being able to take cash from customers.
• Lawsuits, problems with customer service, and a damaging image.

It is imperative to follow all relevant rules at all times. And the only way to be sure it’s correct and up-to-date is to check the billing processes regularly.

Compliance with regulations for SaaS billing

Regulatory requirements are very different for each business. Some are for every business, while others are just for a particular country, field, or payment processor.

Payment Card Industry Data Security Standard (PCI DSS)

For subscription companies, credit cards are the standard way to pay. PCI DSS is a set of strict security rules that all businesses that accept, handle, store, or send credit card information must follow to keep it safe. Its job is to protect credit card information from being stolen or leaked.

Not following the rules is a serious offense that can lead to fines reaching a staggering $500,000 per episode. Besides this, subscription companies might have to deal with more audits, a bad reputation, and, worst of all, losing customers.

After all, no one would want to work for a company that doesn’t protect their private payment data.

To stay in line with PCI DSS, you must use a billing tool that puts security first when processing digital data. Choose systems that let your customers use electronic payment gateways that are PCI-compliant.

This method does two things: it protects your customers’ private information and speeds up the processes for collecting debts, which helps your cash flow.

Sox and Sarbanes-Oxley

SOX was meant to improve financial transparency and corporate governance during high-profile business scandals. Because they have recurring billing cycles, subscription companies have a more challenging time following this law because even small mistakes can have significant effects when spread out over many billing cycles and customer accounts.

When a customer updates or changes their account, like adding new users, changing payment methods, or upgrading their plan, it could cause many SOX compliance issues. For instance, revenue must be correctly recorded throughout the period, and any subscription changes should be appropriately noted immediately after reporting. In addition, companies must report changes to their finances that are important and complete within a certain amount of time.

Modern billing systems make it much easier for subscription companies to stay in line with SOX, which is good news. Advanced software can automatically track and report changes in customer subscriptions, ensuring that income is correctly recorded and reported.

VAT in the EU

The European Union Value-Added Tax (EU-VAT) is a tax on goods and services sold in the European Union (EU). EU-VAT can be challenging for European and international subscription businesses to understand and follow.

The EU VAT system is complicated because rates change between the 27 member states of the EU and within certain businesses or product groups. This means a SaaS company with customers in more than one EU country must charge each customer a different VAT rate for the same service based on where the customer lives.

The “destination principle” that the EU applies to digital services, like most SaaS products, worsens the problem. This concept says that VAT should be charged based on where the customer is, not where the business is. So, if a Spanish SaaS company has a German customer, it needs to use the German VAT rate on the invoice for that account.

The California Consumer Protection Act

Regarding privacy laws, the California Consumer Privacy Act (CCPA) is one of the most critical changes in the United States. This law, which went into effect in 2018, lets people in California know what personal information companies gather about them, why they collect it, and who they share it with.

People who run subscription businesses that regularly gather and process customer data need to pay extra attention to the CCPA. If a subscription business meets specific requirements, it has to follow the CCPA. This is the case whether the company is a streaming service with millions of subscribers or a niche software provider with only a few users.

Under the CCPA, businesses must follow any of the following rules:

• Gross sales of more than $25 million a year
• Having the personal information of at least 50,000 customers, families, or devices
• Making at least half of their yearly income from selling customers’ personal information

The CCPA says that if you are a subscription company serving California residents and fit into any of these groups, you must follow its rules. If you don’t, you could face civil fines of up to $2,500 for each violation that wasn’t done on purpose and $7,500 for each violation that was done on purpose.

Because the CCPA lets people choose not to have their personal information sold, companies need to look at their data policies and maybe change them. This can include how they get customer information, store it, use it, and share it. Businesses should be ready to give customers detailed information about how they use customer data if they ask for it, and they should also be ready to delete information if a customer asks them to.

GDPR stands for the General Data Protection Regulation

GDPR is a law from the European Union that protects people’s right to privacy when it comes to their data in the EU and the European Economic Area (EEA). It affects all businesses worldwide that sell items or services to EU citizens or watch how they act. Since every business has a website that people worldwide can visit, GDPR compliance is likely to come up somehow.

To comply with GDPR, data management methods need to be rethought entirely. Here are some essential things to think about:

• Less data is better. GDPR supports a policy called “data minimization,” which tells businesses only to gather and process the personal data they need to provide their service. This could mean looking at the information you gather when a person first signs up, renews their subscription, or uses your app or service.
• Yes or no. GDPR says that companies must get users’ permission before taking their data. People asked to agree must be told clearly what they are agreeing to. Companies must also make it easy for users to take back their permission.
• It is keeping data safe. Protect personal information from breaches by putting in place robust security measures. This could mean encrypting data, doing regular security checks, and making a solid plan for handling incidents.
• Right to see and delete information. Users can see what personal information a company has about them and ask for it to be deleted if they want to under GDPR. Companies need to set up ways to quickly and correctly respect these rights.
• Officer for protecting data. Some businesses, especially those that handle susceptible data, need to hire a Data Protection Officer (DPO) to ensure they follow GDPR rules and protect customer data.

Modern software for managing subscriptions can handle user consent, data minimization protocols, and requests to view and delete data.

PSD2

Regulations that the European Union (EU) applies are called PSD2 and are meant to make electronic payments safer and more innovative. It sets strict security rules for electronic payments and the safety of customers’ financial information, which significantly affects the ecosystem of subscription services.

Strong Customer Authentication (SCA) is an integral part of PSD2. This means businesses must use two separate forms of validation before processing transactions. Such things could be something the customer knows (like a password), something they have (like a phone), or something they are (like a fingerprint).

The rule says that even repeating transactions, which usually don’t need extra security, might need SCA. But in some situations, “merchant-initiated transactions” (MITs), which can include many subscription payments, may not be subject to SCA. This needs to be agreed upon by both the seller and the customer’s bank, and the customer must give explicit permission.

Still, it can be hard to distinguish between activities that need SCA and those that don’t. If a transaction goes around SCA when it shouldn’t, the customer’s bank may not accept the payment. This makes it possible for service interruptions and subscriptions to be lost.

In this case, a robust payment system is essential. Companies can meet the SCA requirements with the help of a system that works with payment gateways that support 3D Secure 2.0. This is the primary way that companies can meet the SCA requirements online. These platforms also let subscription businesses set up safe gateways for any deals they make, which stops fraud from happening.

SOC 1 and SOC 2

System and Organization Controls (SOC) 1 and SOC 2 are checks meant to ensure that customer data is safe, accessible, processed correctly, and kept private. These are the two kinds of guarantee reports that service providers give to their clients after a third-party auditor checks them.

SOC 1 looks at the controls and systems that affect how a business reports its finances. SOC 1 Type 1 reports look at how these controls were designed at a certain point, while Type 2 reports look at how well they worked over a specific period. A business that has a billing platform that is SOC 1 compliant makes sure that it has all the controls it needs to record and report accurate financial data.

SOC 2 is mainly about the controls a business has to keep private data safe. This includes privacy, protection, availability, processing integrity, and processing honesty. Because subscription companies often deal with personal data, SOC 2 compliance is necessary. Billing that is SOC 2 qualified shows that a business has implemented safe ways to keep private customer data safe.

ASC 606

ASC 606 makes it hard for subscription companies to figure out how to record revenue. Buyers can sign up for multiple plans with a subscription model or buy extra seats. They can also pay for one-time services like training or implementation and use a billing model based on usage.

This process can be made even more difficult by promotional pricing strategies like penetration pricing that include regular fee hikes built into the contract. Customers can change their plans during the subscription period by upgrading or downgrading them. This can affect how much they pay and how the company records customer revenue.

Businesses must record all customer revenue sources as soon as they meet their performance responsibilities, according to ASC 606. It doesn’t matter when the payment is received. If you have an old payment system, you can’t keep track of all these constant changes on a large scale.

Financial Reporting Standards from Around the World

The International Financial Reporting Standard (IFRS) for income from contracts with users is IFRS 15. The standard tells businesses how to record, measure, show, and discuss income from customer contracts.

There are five steps in the IFRS 15 framework:

1. Find the contract(s) you have with a customer.

2. Find the contract’s performance duties.

3. Find out how much the deal costs.

4. Assign the transaction price to the performance duties of the contract.

5. Recognize income when (or as) the business meets its responsibilities.

In that way, it’s like ASC 606, but it affects the whole world. It affects how subscription businesses combine and show their financial records, how assets and liabilities are classified, and how P&L reports are made. Companies that follow these standards make sure that they report their financial success clearly and accurately.

Follow-up on taxes

SaaS products are digital, so businesses can quickly reach customers anywhere. It also means they may have to pay taxes in any country, which is problematic for global businesses.

For example, the European Union’s VAT rules say that businesses must collect tax based on where the customer is located, not where the company is. Countries like Australia, New Zealand, and South Africa have similar rules.

With its complicated sales tax system, the United States makes it harder to pay your taxes. With a VAT system, tax rates are pretty much the same everywhere. But in the U.S., sales tax rates range from state to state and even within states. Some places charge for services, and some places don’t. In a single zip code, there may be more than one tax region, each with its own rules and rates.

A customer’s state or ZIP code is insufficient to determine their taxes correctly. Before companies can correctly figure out their taxes, they need to know the exact address, the type of product or service, and information about the customer.

Automating billing ensures compliance.

Automated billing is the most important thing for any accounting, billing, or sales team. Businesses that offer subscriptions can easily follow all the rules that apply to them when they use automatic billing software.

Correct Recognition of Revenue

Automated billing systems are made to record revenue over the subscription term instead of when the bill is paid. This is especially important when you pay ahead of time for a service or product, like with a prepaid pay-as-you-go plan.

Also, they give businesses complete, real-time reports on recognized and deferred income, making it easier for them to make financial statements and pass audits. With audit logs, they can show that every transaction follows all the rules and standards for accounting.

Accuracy of Data

You can’t enter information by hand without making mistakes. It is physically impossible for a person to remember all the rules that apply to all their company’s customers. Software that automates payments can. It eliminates mistakes made by people and ensures that all customer information is correct.

This is especially important for companies with many customers since even small mistakes in the data can cause issues when paying taxes or going through audits.

Synchronization of Data

Most subscription and SaaS businesses have more than one system. For example, they might have a CRM for customer data, an ERP for financial data, analytics for performance, and a CPQ for selling and setting up products. When billing is added, there is a clear flow of data from when a customer joins the sales pipeline (CRM) to when they make their last payment (cancellation management for subscriptions).

Businesses can figure out the customer lifetime value (CLV) and make prediction models to guess how things will go in the future by using billing data as an essential part of the whole picture.

Safety of Data

Security is probably the most essential part of compliance. Automated billing systems use advanced encryption and authentication methods to prevent hackers and other security threats from accessing customer data.

They also give businesses a complete picture of what users are doing so they can spot problems quickly. Using role-based user management tools to keep a tight grip on entry permissions is the best way to keep data safe within the company.

Watching the data

Businesses can set up their billing software to automatically send alerts and triggers when new deals come in. So, when a user buys a product, starts a trial, or pays an invoice, they are immediately notified.

There are two good things about this:

1. Businesses can find any problems before customers tell them or customer service has to deal with them.

2. They can fix mistakes in compliance before the government steps in.

Best Practices for Making Sure SaaS Billing Is Correct

Use tools for automatic billing.

Using software that makes automatic payments could be the most important thing you can do for your business. Automated billing systems ensure you’re following the rules and reduce the amount of work needed in the back office. Still, they also give you complete visibility into your finances, which will help you make more money and connect better with investors.

Learn about the rules that apply to you.

Rules are very different from one place to another, and they can change quite often. It’s essential to keep up with these changes. Take some time to carefully think about your business and the places where it works to make sure you understand the rules that apply.

Spend money on data security.

The exact number of data protection features you need will depend on how sensitive your business is. It’s wise to spend money on tools that let you see and control what users can do. The basics are what most billing tools will give you. But FinTech, healthcare, and other businesses with many rules will need more advanced solutions.

Tell your customers the truth about how they’ll be billed.

This means sending out clear invoices that include all the necessary information, telling customers about any changes to price or subscription plans, and responding quickly to any billing questions. Getting rid of hidden fees and breaking down your customers’ monthly bills will make them happier and keep you out of trouble with the law when they question your bills.

Regularly audit and review your internal processes

Regular checks can help ensure rules are followed, find trouble spots, and reduce risks before they become big problems. To maintain a high level of billing compliance, you need to regularly review your billing processes, data management methods, and compliance rules.