The 4 questions you need to answer
1. Is my product taxable?
Twenty years ago, this question had a simple answer. If you could touch it, it was tangible personal property and subject to sales tax. These days, though, the question is much more complicated and the answer varies by state. Some states now tax digital goods and services.
This means that the first step to understanding sales tax is to make a list of products and services that you offer so that you can start looking into whether they’re subject to tax. Remember that as states continue to play catch-up with the modern world, what’s non-taxable today might be taxable tomorrow. If you are tracking sales tax manually, you’ll need to keep your eyes peeled for changes.
This is where Anrok comes in. Just tell us what you sell and our platform will do the hard work for you, tracking legislation and updating the tax rules attached to your products and services. Moreover, since we focus on SaaS, selecting the relevant product in Anrok is super straightforward.
2. Do we have a distributed team?
We talked in a previous article about the concept of nexus and the tax implications that it can have. There are two ways that a company can establish nexus in a state: economic nexus and physical nexus. This question focuses on a common method of establishing the latter via remote employees.
Physical nexus typically happens when you have an employee either working from your office or working remotely in a state. It can also be triggered if you have a significant amount of property in a state, including everything from server equipment and data centers to warehouses.
Given that your team is hiring all over, it can be tricky to identify and track where your business has physical nexus. Fortunately for you, this is something you can track within Anrok. You can even set the exact date in which someone was first hired in the state.
Once nexus has been established, you’ll need to register for sales tax in the state. Don’t immediately start charging and collecting sales tax from customers, though. Each state requires you to first register for a sales tax permit before tax can be collected.
Until you have a valid permit from the state, you can’t charge your customers. Failure to comply is unlawful, and states take this step very seriously. It’s a good thing that modern sales tax solutions allow you to register within the application and schedule to only start remitting after a registration has been processed successfully.
3. Are we making over $100,000/year in any state?
The next question to ask yourself is whether you’re making over $100,000 a year in any given state. While different states have different revenue and transaction thresholds, you can use $100,000 as a rough lower limit to figure out whether you need to do a detailed nexus study. If you have crossed this rough threshold in any state, it is worth doing a deeper dive.
Certain states in particular are popular amongst customers of SaaS companies. They can also be popular audit hotspots so you’ll want to pay particular attention to the following:
- Connecticut: B2B SaaS is taxed at 1%, with the nexus threshold set at $100,000 in sales and 200 transactions.
- New York: Charges a state-wide rate of 4% plus local rates ranging from 3-4.5%, with the nexus threshold set at $500,000 in sales and 100 transactions.
- Pennsylvania: Charges a state-wide rate of 6% plus local rates in Allegheny County and Philadelphia, with the nexus threshold set at $100,000 in sales.
- Texas: Charges a state-wide rate of 6.25% plus local rates up to a maximum combined rate of 8.25%, with the nexus threshold set at $500,000 in sales.
- Washington: Charges a state-wide rate of 6.5% plus local rates, with the nexus threshold set at $100,000 in sales.
Over 20 states tax software or services related to software. You can read more about 5 common SaaS taxing states here.
4. Are we creating more than 100 invoices/year in any state?
As well as the sales threshold, you might have noticed that some states also have a transaction threshold for establishing nexus. You can think of one transaction being equivalent to one invoice, so 100 or 200 transactions per year is relatively easy to hit.
For example, if you’re a subscription business that invoices monthly, one customer can count for 12 transactions. As you can imagine, that adds up quickly and you can easily end up crossing the transaction threshold even if you’re nowhere near the sales threshold. Luckily for you, some states require you to hit both thresholds before you need to pay sales tax.
What are our revenue goals this year?
Knowing your revenue goals is always important, and even more so when prioritizing when to tackle sales tax. Having clear goals helps you to contextualize the magnitude of sales tax impact. Finance leaders need to think about whether they’re ready to foot the sales tax bill instead of collecting sales tax from customers.
Remember that your sales tax is typically around 4.3% and can be as high as 11% in some states. This money has to come from somewhere, which is why you need to plan ahead and consider your revenue goals as early as possible. If you don’t, it’s going to be difficult to foot the bill once it’s due.
Do we have the resources to support multiple audits?
Software sellers – particularly those that are headquartered in California – have gone from not having to worry about sales tax to having to worry about it not just in their home state but in every state in which they have remote employees or economic nexus.
This means that the chances of being audited have shot up. There are now literally dozens of states where you’re liable to collect sales tax and might get audited, and so you need to be prepared for it. If you don’t have the resources in place to support an audit, you should start investing in an automated compliance solution to make sure that you’re covered. It’s simpler to address the problem as you become exposed, rather than to allow the liability to accrue and to try to fix the mess months or years later.
These six questions are by no means comprehensive, but it should give you the information you need to get started with sales tax. Remember that it’s your responsibility as a business owner to ensure that you comply with all relevant regulations and that you pay your sales tax on time.
With that said, it doesn’t mean that you have to go it alone. If you’re struggling to work out where you’re exposed and how much sales tax is costing you, you can simply import your transactions in Anrok and get a full picture with just a few clicks.
Contact Anrok today to find out what we can do for you.