Billing Compliance

What is Billing Compliance?

For subscription services and SaaS companies, billing compliance refers to the complex billing, accounting, and legal processes related to collecting recurring subscription payments. It verifies these companies accurately bill their customers on schedule, follow company and government payment rules/policies, and recognize and report revenue according to Generally Accepted Accounting Principles (GAAP).

Recurring revenue is what makes the subscription business model so scalable. With predictable sources of recurring payments, subscription companies can ease off the gas when it comes to customer acquisition. Instead, they can focus on growth initiatives like product development and new market entry.

For software-driven subscription services like SaaS and streaming platforms, this is even more so the case. Software can be created once then updated and maintained indefinitely. Supporting additional users doesn’t require internal consideration like traditional service-based businesses (which require additional team members, office space, or other resources to scale).

Unprecedented scalability does, however, have a downside. As these companies take on new subscribers and bake new features into their platforms, accounting complexity increases by a power of ten.

Synonyms

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

Importance of Compliant Billing for Subscription Businesses

Recurring billing presents several complexities that one-time billing doesn’t. Regulatory compliance is important for every type of company. But accounting for one-time payments is a whole lot easier because customers pay each product or service in a single lump sum.

Subscription companies have to bill for long-term services and reconcile payments over time. Accounting for taxes, discounts, refunds, cancellations, payment intervals (monthly vs. annually), currency fluctuations, international regulations (and more) might be simple for a new startup with 100 subscribers. But it’s the most mind-boggling of puzzles for a SaaS company with thousands.

Financial Accuracy

“How much did the company grow last quarter?”

“How are we retaining and expanding revenue within our current subscriber base?”

“What do we need to do to improve customer loyalty?”

Without accurate financial data, the boardroom gets a lot quieter after someone asks these questions.

Since billing data (e.g., customer payments, revenue per user, subscription lifetime) is the source of all the answers, failure to handle it effectively results, at best, in poor revenue forecasting and misinformed business decisions.

Financial accuracy is also paramount come tax season. The IRS audits thousands of companies each year, and they’re not afraid to go after those whose books are anything less than wholly accurate.

Compliant billing practices mean those that accurately reflect the financial health of the company.

Financial Transparency

On the contrary, accurate financial data helps an organization forecast future cash flow, accurately report revenue, and forecast customer churn. Aside from saving boatloads of time and money during taxes, having these insights is essential for making the right strategic decisions.

The residual benefit of financial transparency through billing compliance is improved relationships with stakeholders, investors, and the Board. For companies looking for new investments, it’s also a faster route to getting there.

Regulatory Compliance

As subscription platforms take on new users, every point of contact is a new risk for a breach of security and privacy laws. Noncompliance is a huge threat because it could result in:

• having to pay hefy fines for failure.
• inability to accept payments from customers.
• lawsuits, disruption of customer services, and a tarnished reputation.

Being compliant with all applicable regulations is non-negotiable. And the only way to ensure it’s up to date and relevant is to audit billing operations regularly.

SaaS Billing Compliance: Regulatory Requirements

Depending on company specifics, regulatory requirements vary wildly. Some apply to every company, while others are specific to a country, industry, or payment processor.

Payment Card Industry Data Security Standard (PCI DSS)

Credit card payments are the norm for subscription businesses. PCI DSS is a set of stringent security standards that ensure all companies accepting, processing, storing, or transmitting credit card information uphold a secure environment. It’s meant to keep customer credit card data safe from data breaches and theft.

Non-compliance is not a light matter and comes with severe penalties, including fines that can skyrocket up to $500,000 per incident. On top of this, subscription businesses could face increased audit requirements, a tarnished public image, and, perhaps most damagingly, customer loss.

After all, who would want to stick around with a company that doesn’t safeguard their sensitive payment information?

To stay on the right side of PCI DSS compliance, it’s essential to adopt a billing platform that prioritizes security in digital processing. Opt for platforms that allow your customers to utilize PCI-compliant, electronic payment gateways.

This approach serves a dual purpose: It not only shields your customers’ sensitive data but also accelerates your accounts receivable processes, thereby improving your cash flow.

Sarbanes-Oxley (SOX)

In an era marked by high-profile corporate scandals, SOX was a response intended to bolster corporate governance and financial transparency. Subscription businesses, with their recurring billing cycles, face unique challenges in adhering to this legislation, as even minor miscalculations can have significant effects when extrapolated across numerous billing cycles and customer accounts.

Every time a customer updates or modifies their subscription — for instance, upgrading their plan, adding new users, or changing payment methods — it triggers a host of potential SOX compliance concerns. For example, revenue must be recognized accurately over the service period and modifications to subscriptions should be immediately reflected in the financial reporting. Additionally, there are requirements for timely, comprehensive disclosure of material changes affecting a company’s financial condition.

The good news is that modern billing systems make it significantly easier for subscription businesses to maintain compliance with SOX. Sophisticated software can automatically track and account for changes in customer subscriptions, ensuring revenue is correctly recognized and reported.

EU-VAT

The European Union Value-Added Tax (EU-VAT) is a consumption tax applied to goods and services within the European Union (EU). For European and multinational subscription companies, EU-VAT can present a maze of compliance requirements.

The EU-VAT system is complex because rates vary among the EU’s 27 member states and can even fluctuate within specific industries or product categories. This means a SaaS company with subscribers across multiple EU countries has to apply different VAT rates for the same service, depending on the subscriber’s location.

The challenge further intensifies with the “destination principle” the EU applies to digital services, like most SaaS products. This principle stipulates that VAT is charged based on the customer’s location rather than the company’s. Hence, if a Spanish SaaS company has a German customer, the company would need to apply the German VAT rate to that customer’s invoice.

California Consumer Protections Act (CCPA)

The California Consumer Privacy Act (CCPA) represents one of the most significant legislative privacy developments in the United States. Enacted in 2018, this act gives California residents the right to know what personal data businesses collect about them, why it’s collected, and who it’s shared with.

Subscription businesses, which routinely collect and process customer data, need to pay particular attention to CCPA. Whether it’s a streaming service with millions of subscribers or a niche software provider with a handful of users, CCPA compliance becomes an absolute must if a subscription company meets certain thresholds.

Businesses that meet any of the following criteria are subject to CCPA:

• Annual gross revenues exceeding $25 million
• Possession of personal information of 50,000 or more consumers, households, or devices
• Deriving 50% or more of annual revenues from selling consumers’ personal information

What this means is, if you’re a subscription business that serves California residents and falls into any of these categories, you are obligated to comply with the CCPA. Failure to do so can result in civil penalties of up to $2,500 for each unintentional violation and $7,500 for each intentional violation.

Given that CCPA allows consumers to opt out of the sale of their personal data, businesses have to review (and potentially modify) their data practices. This can include how they collect, store, use, and share customer data. For instance, businesses must be ready to provide detailed information about their data practices upon customer request and be prepared to delete info if a customer asks to do so.

General Data Protection Regulation (GDPR)

GDPR is a European Union regulation that strengthens the data privacy rights of individuals within the EU and European Economic Area (EEA). It affects any company worldwide that offers goods or services to, or monitors the behavior of, EU residents. Since every company has a website (that others around the world can access), chances are good GDPR compliance will come up in some way.

GDPR compliance requires a comprehensive overhaul of data management practices. Here are some crucial considerations:

• Data minimization. GDPR advocates a policy of “data minimization,” where companies are encouraged to collect and process only the necessary personal data required to fulfil their service. This could mean reevaluating what data you collect during user onboarding, subscription renewal, or through your app or service.
• Consent. GDPR requires businesses to obtain explicit consent from users before collecting their data. The request for consent must be in simple terms, and users must know exactly what they’re agreeing to. Companies must also allow users to withdraw consent as easily as they gave it.
• Data protection. Implement robust security measures to protect personal data from breaches. This could involve encryption, routine security audits, and establishing a reliable incident response plan.
• Right to access and erasure. Under GDPR, users have the right to access their personal data held by a company and also have the right to request its deletion. Companies must have mechanisms in place to honor these rights swiftly and accurately.
• Data protection officer. Larger companies, or those processing particularly sensitive data, are sometimes required to appoint a Data Protection Officer (DPO) who oversees data protection strategy and GDPR compliance.

Modern subscription management software can manage user consent, handle data minimization protocols, and facilitate access and erasure requests.

PSD2

The Revised Directive on Payment Services, or PSD2, is a regulation the European Union (EU) enforces to create safer and more innovative electronic payments. It introduces strict security requirements for electronic payments and the protection of consumers’ financial data, significantly impacting the subscription services ecosystem.

A significant part of PSD2 is the requirement for Strong Customer Authentication (SCA), which requires businesses to use two independent sources of validation before processing transactions. This could include something the customer knows (like a password), something the customer has (like a mobile device), or something the customer is (like a fingerprint).

Under the regulation, even recurring transactions, traditionally exempt from additional authentication, could require SCA. However, certain ‘Merchant-Initiated Transactions’ (MITs), which can include many subscription payments, may be exempt from SCA under specific conditions. The merchant and the customer’s bank need to have a framework agreement for this, and the customer must give explicit consent.

Nevertheless, the line defining which transactions require SCA and which ones qualify for an exemption can be blurry. If a transaction mistakenly bypasses SCA when it shouldn’t, the customer’s bank may decline the payment. This creates the risk of service disruption and subscription churn.

The role of a robust billing system becomes crucial here. Such a system can aid businesses in complying with the SCA requirements by integrating with payment gateways that support 3D Secure 2.0 – the primary method for meeting SCA requirements online. These platforms also enable subscription businesses to establish secure gateways around any transactions that they initiate, preventing potential fraud.

SOC 1 & SOC 2

The System and Organization Controls (SOC) 1 and SOC 2 are auditing procedures that aim to ensure customer data’s security, availability, processing integrity, and confidentiality. They are two types of assurance reports that service providers deliver to their customers (clients) after undergoing an audit conducted by a third-party auditor.

SOC 1 focuses on the processes and controls that impact a company’s financial reporting. SOC 1 Type 1 reports evaluate the design of these controls at a specific point in time, while Type 2 reports assess their operational effectiveness over a specified period. Having a SOC 1-compliant billing platform ensures that a company has the necessary controls in place to record and report financial data accurately. 

SOC 2 primarily works with the controls a company has to protect sensitive data. This encompasses security, availability, processing integrity, confidentiality, and privacy. Given the large volume of personal data subscription businesses often handle, SOC 2 compliance is essential. SOC 2-compliant billing means a company has secure measures in place to protect sensitive customer information. 

ASC 606

Revenue recognition under ASC 606 is complicated for subscription businesses. Under a subscription model, customers may subscribe to multiple plans or purchase additional seats, pay for one-off services like implementation or training, and follow a usage-based billing model all at the same time.

Promotional pricing strategies like penetration pricing with regular fee uplifts built into the contract can further complicate the process. During the subscription period, customers may choose to upgrade or downgrade their plans, leading to changes in their payment obligations and, therefore, how the company accounts for revenue from its customers.

Under ASC 606, businesses need to recognize revenue from all customer revenue sources when (or as) they fulfill their performance obligations, irrespective of when the payment is received. With a legacy billing system, accounting for these continuous changes at scale is impossible.

International Financial Reporting Standards (IFRS)

IFRS 15 is the International Financial Reporting Standard (IFRS) for revenue from contracts with customers. The standard sets out how businesses should recognize, measure, present, and disclose revenue from customer contracts.

The IFRS 15 framework comprises five steps:

1. Identify the contract(s) with a customer
2. Identify performance obligations in the contract
3. Determine the price of the transaction
4. Attribute the transaction price to the contract’s performance obligations
5. Recognize revenue when (or as) the company meets obligations

In that sense, it’s similar to ASC 606 but with global implications. It determines how subscription businesses prepare and present their financial statements, impacting asset/liability classification and P&L reporting. Adherence to these standards ensures companies report their financial performance accurately and transparently.

Tax Compliance

The digital nature of SaaS products means businesses can instantly reach customers anywhere. It also means they can be subject to taxes in any jurisdiction — a challenging task for global companies.

For instance, the European Union’s VAT regulations require businesses to collect tax based on the customer’s location, not the business’s. Similar rules apply in countries like Australia, New Zealand, and South Africa. 

The challenge of tax compliance intensifies in the United States due to its intricate sales tax system. Unlike a VAT system with relatively uniform tax rates, U.S. sales tax rates vary from state to state, even within states. Some jurisdictions tax services, while others do not. Multiple tax jurisdictions may exist within a single zip code, each with its own rules and rates.

A customer’s state or ZIP code is insufficient for accurate tax calculation. Companies must factor in the exact address, product/service type, and customer information before accurately calculating taxes.

How Billing Automation Ensures Compliance

Automated billing is the single most important piece of the puzzle for any accounting, billing, or revenue team. With automated billing software, subscription businesses can easily adhere to all the compliance standards that apply to them specifically.

Accurate Revenue Recognition

Automated billing systems are designed to recognize revenue over the subscription period rather than at the point of payment. This is particularly critical for businesses that collect payment upfront for a service or product, such as a prepaid pay-as-you-go plan.

They also provide comprehensive, real-time reports on recognized and deferred revenue, making it easier for businesses to prepare financial statements and stand up to audits. With audit trails, they can prove that every transaction complies with all applicable accounting standards and regulations.

Data Accuracy

Error-free manual data entry is impossible. No human can physically remember every regulatory implication and apply it to all the customers in an organization. Automated billing software can. It eliminates human errors and ensures accuracy across all customer information.

This is especially important for businesses that deal with large numbers of customers, where even minor data inaccuracies can lead to problems while filing taxes or during audits.

Data Synchronization

Most SaaS and subscription companies have multiple systems — CRM for customer data, ERP for financial data, analytics for performance, CPQ for quoting and product configuration. Adding billing into the mix creates a logical data flow from the first moment a customer enters the sales pipeline (CRM) through their last payment (subscription management for cancellation).

With billing data as a critical part of the overall picture, businesses can understand customer lifetime value (CLV) and build forecasting models to predict future performance.

Data Security

Security is perhaps the most critical element of compliance. Automated billing systems use advanced encryption and authentication protocols to protect customer data from hackers and security threats.

They also provide comprehensive visibility into user activity, so businesses can spot potential issues quickly. The best way to ensure data security internally is to maintain a tight grip on access permissions using role-based user management tools.

Data Monitoring

Businesses can configure their billing software with automated triggers and alerts for incoming transactions. That way, they receive real-time notifications when customers purchase a product, start a trial, or pay an invoice.

The benefits of this are twofold:

1. Businesses can identify any issues before customers report them, or customer service has to manage them.
2. They can fix compliance errors before a regulator gets involved.

Best Practices for SaaS Billing Compliance

Use automated billing systems

Potentially the most important implementation you can make for your business is to use automated billing software. Besides ensuring compliance and streamlining the back office workload, automated billing systems provide complete financial visibility, which will help you maximize your revenue and communicate better with investors.

Understand your regulatory landscape

Regulations differ vastly from one jurisdiction to another and can change quite frequently. Staying updated with these changes is crucial. Carefully consider the ins and outs of your business (and the locations it functions in) to make sure you understand the regulations that apply.

Invest in data security

Depending on how sensitive your industry is, the exact data security features you need will vary. Generally speaking, it’s best to invest in technologies that give you visibility and control over user access rights. Most billing software will offer the basics. But FinTech, healthcare, and other highly regulated industries will require more advanced solutions.

Be transparent with customers about their billing

This includes providing clear and detailed invoices, communicating any changes to subscription plans or pricing, and promptly addressing any billing queries. Eliminating hidden fees and itemizing their monthly bills will boost customer satisfaction and help you avoid legal issues related to billing disputes.

Regularly audit and review your internal processes

Regular audits can help ensure ongoing compliance, identify any areas of concern, and mitigate potential risks before they become major issues. Regular reviews of your billing processes, data management practices, and compliance protocols are essential to maintain a high standard of billing compliance.

People Also Ask