Taxes: Overview, definition, and example
What are taxes in a contract?
Taxes in a contract refer to the financial obligations related to government-imposed levies, duties, or charges that arise from the performance of the agreement. A taxes clause defines which party is responsible for paying specific taxes associated with the contract, such as sales tax, VAT, or income tax.
For example, in a sales agreement, the contract might state whether the buyer or the seller is responsible for paying sales tax on the transaction.
Why are taxes important?
Taxes are important because they ensure clarity and compliance with legal requirements related to financial transactions. By clearly defining tax responsibilities in a contract, parties can avoid disputes, unexpected costs, or penalties for non-compliance.
For SMBs, including a taxes clause in contracts helps manage financial obligations, ensures adherence to tax laws, and minimizes the risk of misunderstandings or conflicts.
Understanding taxes through an example
Imagine a software company sells a subscription service to a client. The contract includes a taxes clause stating:
- “The Client shall be responsible for paying any applicable sales tax, value-added tax (VAT), or similar taxes related to the purchase of the subscription.”
This ensures that the client, not the software company, is liable for the taxes associated with the subscription.
In another example, a freelance graphic designer working for an international client might include a clause:
- “All taxes applicable to the fees paid under this Agreement shall be borne by the Client, except for taxes on the Designer’s income, which shall be the sole responsibility of the Designer.”
This prevents confusion about who bears the burden of taxes for cross-border services.
An example of a taxes clause
Here’s how a taxes clause might appear in a contract:
“Each Party shall be responsible for the payment of all taxes, levies, and charges imposed by any governmental authority on its income or operations. Any sales tax, value-added tax (VAT), or similar taxes arising from this Agreement shall be borne by [Insert Responsible Party], unless otherwise stated.”
Conclusion
Taxes clauses provide a clear framework for managing tax obligations in a contract. By specifying which party is responsible for various taxes, these provisions reduce uncertainty and ensure compliance with applicable tax laws.
For SMBs, including a detailed taxes clause in contracts is essential for avoiding disputes, managing costs, and maintaining legal compliance. This clarity helps build stronger, more transparent business relationships.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.