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.
Controller: I have remote employees all over the place. How do I keep track of where I need to start collecting and remitting sales tax?
Anrok: It can definitely get complicated. The good news is Anrok is here to make your life easier. We have an automated physical nexus product that will track where you have employees and where that creates a filing requirement for your company. Anrok connects to your HR system without any code and will notify you when an employee has created physical nexus in a new state that taxes your product.
Controller: So all that matters is where I have employees or offices?
Anrok: Unfortunately, it’s not that simple. There is also something called economic nexus. This was introduced in 2018 in the South Dakota v. Wayfair Supreme Court case that impacted remote sellers. States can now require sellers like yourself to collect sales tax based on how much they are selling in that state. Every state has different rules, but they lay out thresholds of either the volume of transactions or the dollar amount (or sometimes both) that establish a connection with the state. That connection creates the obligation to collect and remit sales tax. But there’s good news here too: Because Anrok connects directly to your billing and payment systems, we keep track of the sales volume and dollar amounts and compare them against these thresholds for you. The platform can also tell you whether your products are taxable in the given state.
You can read more about what is nexus in our blog post here.
Controller: So, if the company crosses these thresholds in the first year, but then sales somehow decrease the next year, can we stop collecting sales tax?
Anrok: Not necessarily. There can be a lingering responsibility to collect sales tax in the years after you initially crossed nexus. You might find this article on trailing nexus helpful.
Controller: Got it. Let’s say that I’ve crossed nexus in the state, and Anrok has helped me register for sales tax. Do I need to review every transaction and check whether they are taxable transactions?
Anrok: No, the platform automates all of this for you. The Anrok platform gets notified when your billing or payment system creates an invoice and sends it to Anrok to apply the correct sales tax determination in real-time. Anrok will keep track of all your transactions and organize them into the appropriate returns. You can choose to review these at the end of each month, or just let Anrok file and remit the returns for you without lifting a finger.
Controller: This is great! It sounds like you guys have everything covered. Let’s see a demo!
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