Your product, being an internet start-up in the world of 2026, is seldom very single. It is probably a combination of software (SaaS), automated data processing, and professionally delivered services by humans.
This bundling produces a smooth user experience; however, it does create a huge tax trap. While many business owners focus on topics like what is Foreign Tax Credit, they often overlook state-level tax rules. In most states, when you sell a taxable service (such as SaaS) and a non-taxable service (such as consulting) at one price, the whole transaction is taxable.
Is Foreign VAT a “Creditable Tax” under Section 901?
The bundled transaction is when you are selling two or more separate and identifiable products or services at a single non-itemized price. Even the presence of a taxable small segment can be seen by the state auditors as tainting the whole package. Experienced IRS tax experts (former IRS tax agent, former auditor, and experienced IRS tax attorneys from San Francisco) who can build creditable tax profile.
As a case in point, assuming your 1000/month Growth Package has a $100 software seat and 900 non-taxable strategy consulting, many jurisdictions will consider the entire 1000 taxable.
Can you deduct VAT instead of claiming a credit?
In case a bundle is challenged, the IRS and the state authorities use the True Object Test (or the Essence of the Transaction test). The question what is foreign tax credit they pose is: What does the customer really buy? Using a non-professional service as the true object, which is not subject to taxation, and where the software is coincidental to the entire bundle, the entire bundle may be exempt.
The whole invoice is, however, taxable in case the customer is essentially going there due to the software.
States such as Texas and Washington have already amended the loophole of incidents, which have made it difficult to say that software is a byproduct of a service in 2026.
What Is Foreign Tax Credit and How do “Withholding Taxes” differ from VAT in 2026?
A Foreign Tax Credit allows individuals and businesses to reduce their home-country tax liability by the amount of income tax they’ve already paid to a foreign government, helping prevent double taxation.
The easiest thing that you can use to make sure you are not overcharging is to unbundle your bills. This is because by listing taxable software separately and the consulting (not taxable) separately as distinct line items, you will avoid the spread of the taxable taint.
You may have most states charge you the correct rate of tax on each particular item, so long as the prices are reasonable and they correspond to the market. Assuming your invoice records a SaaS (taxed) of $100 and a non-taxable state Consulting of $900, you save the tax amount of net $900.
Is the “Foreign-Derived Intangible Income” (FDII) a better alternative?
Several states adhere to the Streamlined Sales Tax (SST) agreement, as well as a 10 per cent De Minimis rule. When the taxable part of your bundle takes 10 percent or less of the overall purchase price, then the whole purchase can be declared as one that was not taxed.
But it is too risky when start-ups are experiencing high growth. Experienced IRS tax experts (former IRS tax agents, former auditors, and experienced IRS tax attorneys from San Jose) can provide a better alternative in tax files.
The more your software capabilities, the more your taxable value will sneak above that 10 percent bushel into a tax-free package that will become a retroactive liability on an audit examination in 2026.
Conclusion
One of the brilliant business strategies and a hazardous tax action is bundling digital services. The next thing you need to move out of 2026 to protect your margins is to stop charging your legal and invoices on the “all-in-one type.
You can keep more capital in your business by clearly listing what you offer, understanding the true object of the business you are legally selling, and knowing key tax principles including what is Foreign Tax Credit so you pay only what is actually due.
