What Are the Top Regulatory Compliance Issues for SaaS Startups?

For software-as-a-service (SaaS) startups, navigating regulatory compliance takes a lot of work. Rules vary among countries and states. They also change, so current strategies might only work for a few years.

However, compliance is non-negotiable because violations lead to severe consequences. These range from harsh penalties and fines to irreparable damage to brand reputation.

This article discusses these top challenges and how an expert SaaS marketing agency helps you address each:

• Data privacy and security.
• Tax requirements.
• Advertising and marketing regulations.

Read below for examples and tips to steer your business clear of non-compliance pitfalls. Let’s go!

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1. Data Privacy and Security

As a cloud-based platform, SaaS is popular for its convenience, flexibility, and scalability. Consider a writing assistant tool. A blogger uses the basic plan to brainstorm ideas and edit content. 

As the blogger transitions to becoming an agency, they upgrade the services. For example, they choose a plan that adds more “seats” or builds a team. They maximize more professional features, such as keyword research or site audit. 

Unfortunately, the cloud-based business model and its benefits also make SaaS prone to data privacy and security challenges. These include the following:

• Cloud misconfigurations that make the ecosystem or platform vulnerable to security risks.
• Complicated access management (e.g., users create multiple accounts for every team member).
• Big data storage, which makes SaaS appealing to cybercriminals wanting to steal information for financial gain.
• Data theft and leaks, whether deliberate or accidental. 
• Third-party access, which happens when SaaS startups work with other vendors for their operations (e.g., a hacker infiltrates a server containing your data).
• Conflict between operational and informational technology systems (legacy versus automation).

All of these situations lead to non-compliance with some of the strictest safeguards in the world. One of these is Europe’s General Data Protection Regulation (GDPR). Violating this law means paying a hefty fine of €20 million or up to 4% of your total global turnover of the previous year, whichever is higher. 

To grasp the severity of the penalty, Meta had to pay €1.2 billion for mishandling information transmitted between European countries and the United States.

In America, the California Consumer Privacy Act (CCPA) gives users the right to know how a business collects and uses their information. It also provides them the power to delete personal information.
Non-compliance imposes a penalty of $2,500 per non-intentional violation and $7,500 for a deliberate act. Although the fee seems small, it can also compound. Imagine how much you will pay for a class-action lawsuit because you failed to mention certain privacy information during signup.

SaaS startups and marketers must work together to prioritize data privacy and security with these strategies: 

• Consider applying a zero-trust policy, which requires strict identity verification for every user and device trying to access resources.
• Implement access controls, such as multi-factor authentication and role-based access.
• Enable transport and data encryption. 
• Conduct regular security audits and risk assessments to find vulnerabilities.
• Create and test incident response plans for potential data breaches.
• Vet partners and institute data-sharing contracts. 
• Provide data privacy and security training to employees.
• Establish data retention policies and procedures.
• Stay current on changing privacy regulations and adjust practices as appropriate.
• Appoint a legal compliance officer, preferably a SaaS lawyer.

Data is more than a business asset. It is the foundation of trust and loyalty to customers. It exemplifies the values that matter the most to you. Protect it at all costs.

2. Tax Requirements 

Many factors kill SaaS startups, including poor tax compliance and how states (and countries) define the business model. 

For example, in America, seven states tax a SaaS business if it requires customers to download the software. They see the company as offering a product. Meanwhile, 24 states consider such a model as providing services. 

Tax laws themselves are also complicated. Connecticut charges a sales-wide tax rate of 6.35% on digital products. However, SaaS B2B transactions are subject to only 1% (certain conditions apply).

Many SaaS businesses are global and should also follow international tax requirements. The UK, for instance, levies businesses for selling cloud software subscriptions to its residents. 

Canada, on the other hand, charges a tax rate based on the customer’s location. It imposes a 5% goods and services tax if the customers are from British Columbia, Alberta, and Manitoba, among others. Ontario collects 13% as harmonized sales tax.

As if these confusing rules are not enough, you must also manage a growing list of taxes and their requirements. These include income and payroll taxes besides value-added tax. 

How do you handle tax obligations without overburdening your team with more administrative tasks and customers with higher costs?

A SaaS marketing agency helps establish clear guidelines on addressing taxation in campaigns. These include the following:

• Ensure that marketing copy reflects transparent tax obligations. For example, the prices should mention whether they include or exclude tax and which specific taxes apply.
• Display tax-inclusive and tax-exclusive pricing prominently and consistently across channels. 
• Notify customers before any tax rate changes and explain its impact on pricing. 
• Call out unique tax rules or exemptions for the product or service. 
• Provide an accessible frequently asked questions (FAQs) section on taxes. 
• Train creative teams on proper display and communication of taxes in materials they produce to adhere to regulations.

The agency also collaborates with sales and compliance teams to execute these strategies:

• Build tax considerations into business processes early. The billing system, for example, integrates the tax rate when generating invoices.
• Invest in robust billing and payment systems that support tax calculations. Find a system that integrates geolocation to determine appropriate rates.
• Create a tax calendar to track critical filing and payment deadlines. 
• Schedule regular reviews as laws change, especially before entering new markets.
• Maintain detailed transaction records for easy auditing and verification. 
• Seek advanced tax rulings to clarify uncertainties in new jurisdictions.
• Automate tax document collection from customers to avoid errors. 
• Conduct cross-border tax planning when expanding overseas. 

3. Advertising and Marketing Regulations

Besides data privacy and security, advertising and marketing non-compliance is a pressing problem for businesses. In particular, they are prone to misleading advertising and committing intellectual property (IP) violations. 

The European Union, for instance, slapped Google with an antitrust case for distorting competition in advertising technology. Specifically, it accuses the tech giant of manipulating the system to favor its own ad tech, creating an unfair advantage. 

The violation is sometimes less obvious, though. Consider healthcare SaaS.

Because it handles personal health information (PHI), it must follow the Health Insurance Portability and Accountability Act of 1996 (HIPAA) rules. One of these is signing a business associate agreement (BAA), a legally binding contract between:

• A HIPAA-covered entity such as a business or healthcare provider.
• A business associate, an entity that handles PHI.

The problem is many online platforms are not HIPAA-compliant. Facebook, for example, will not enter into any BAA. This means the following campaigns violate the act: 

• The business creates a Facebook ad campaign targeting specific doctor offices in Arizona.
• The platform runs Facebook ads with before-and-after photos of one of its users who lost weight on a diet program. 
• An automated campaign serves a Facebook ad to a user for a smoking cessation program immediately after they search for lung cancer treatments online. 
• The platform retargets former app users with a Facebook ad saying, “We've missed you! Log back into our platform and catch up on managing your diabetes.”

SaaS startups might also be accused of IP violations. It can be as simple as one product or business model sharing similar features with a more established brand. It also happens because of licensing issues, especially when integrating third-party application programming interfaces (APIs) and libraries. 

In the generative AI era, IP problems often stem from the data the language models use to “learn” and improve their processes. These are often published online materials, some of which are proprietary. Getty versus Stable Diffusion is a perfect example of this situation. 

A capable SaaS marketing agency protects a startup from committing these mistakes using these tactics:

• Review all marketing materials and campaigns at every development stage. For example, does it follow the CAN-SPAM Act? Does it adhere to the accessibility requirements of the Americans with Disabilities Act? Are the digital marketing strategies HIPAA-compliant?
• Advise them on proper opt-in processes and disclaimer and disclosure language for emails, content offers, and other communications.  
• Guarantee transparency in affiliate marketing programs and proper disclosure of paid influencer posts.
• Vet lead generation tactics and platforms to avoid privacy violations or deceptive practices.
• Establish processes to document customer consent across channels.
• Consult on managing bidirectional data flows with customer relationship management (CRM) platforms to avoid prohibited uses of collected data.
• Provide training on marketing compliance issues to startup staff involved with advertising.
• Stay current on evolving marketing regulations and advise on necessary campaign adjustments.
• Set up mechanisms to track compliance metrics.

Summing Up

The growing popularity of SaaS opens bigger doors for innovation but also brings new regulatory challenges. 

Complying with regulations protects your vision and elevates your brand as trustworthy, credible, and safe. It also reduces unnecessary costs that come with security breaches, fines, and other penalties. Most of all, it avoids giving an unfair advantage to competitors that cut corners. 

Are you looking for a SaaS marketing agency that prioritizes compliance? Contact Digital Authority Partners (DAP) to schedule a free consultation.