At Anrok, we have a lot of similar initial conversations with controllers and finance leaders at SaaS companies. Most of them are aware that sales tax is an important compliance matter for their company, but they are often confused by why and when software products are subject to sales tax. They want to know why sales tax management problems are costing the company real revenue.
Read on for a behind-the-scenes peek into one of these conversations. This answers some commonly asked questions and might help you in preparing for your own support phone call.
Controller: Hi Anrok, I'm Taylor, the Controller at AirCloud Systems. I've heard that I have to start collecting sales tax in the places where we have an office. Is that correct?
Anrok Account Executive: Hey Taylor! It’s great that sales tax is on your radar. You're right, but there is more to it than that. What you're referring to is physical nexus, which means that you are considered to have a direct physical connection to the state. Nexus is the minimum connection that makes you liable for sales tax collection and remittance. This physical connection can also be established by having remote employees working in the state or even traveling salespeople.
Controller: Wait, so hiring a single remote employee in a state triggers physical nexus?
Anrok: That's right. Sometimes triggering physical nexus in a state isn't a big deal, because the state doesn’t tax your product, so you don’t need to worry about sales tax. For example, California doesn’t tax SaaS or digital goods, so you can have offices and employees in California and never have to collect sales tax there. But in Washington, SaaS products are taxable, so if you have an employee there, you’ll be on the hook to collect and remit sales tax.