The good news is that you don’t have to worry too much, because we’re experts when it comes to sales tax and we’ve done all of the hard work for you by bringing all of our top advice into this article. Let’s take a look at the context, the risk and the path forward for hiring remote workers.
In the US, sellers and service providers have an obligation to register and charge buyers for sales tax on taxable products delivered to customers in states where the seller has “nexus”. The term “nexus” refers to the level of connection between a business and a taxing jurisdiction, and states can constitutionally impose tax requirements on companies with nexus in their state.
There are two types of nexus that are relevant to software-as-a-service (SaaS) companies that a jurisdiction might rely on to impose a tax obligation.
Physical presence nexus: This first type of nexus is the most relevant for the purposes of this post, because it means that the seller has an employee that’s physically working and performing duties for the seller in the jurisdiction. An employee doesn’t even have to live there permanently, because travelling there for any meaningful period of time is often enough to create a filing requirement.
A physical presence nexus can also be triggered by owning or leasing property or other assets in the jurisdiction. You should also note that the physical presence nexus can be triggered by an agent or independent contractor acting on your behalf, as well as by employees.
For SaaS companies, this can include employees who are working remotely, as well as server equipment, data centers or in-state warehouses.
Economic nexus: While less relevant to remote employees, it’s worth mentioning the second common type of nexus experienced by software companies: economic nexus. This type of nexus is triggered when you reach a certain level of sales and/or transactions in a state. Every state defines this differently, and so you’ll need to familiarize yourself with the regulations in every state that you do business in. An example of a nexus threshold could be making $100,000 of sales or hitting 200 transactions in a year.
Now that you know about the two most common types of nexus, the next thing to consider is how much risk is involved with hiring a remote employee and thus establishing a physical presence in that state.
The components of exposure — and how one can quantify risk — include the sales tax amount, penalties and interest. The sales tax amount should be paid by the customer if you meet the jurisdiction’s nexus threshold. If you don’t pass sales tax on to the customer, it will end up coming out of your own pocket. Non-compliance over time will add state-specific penalties and interest on the amount of sales tax due.
It can be difficult to get a handle on just how much sales tax can impact your business. As a software company, you’ll find that you’re making sales across multiple different states, each of which has its own taxability and rate determinations.
We’ve put together a model to calculate the potential drag (or cost) on revenue that sales tax represents. In short, the average non-compliant SaaS business will spend about 4.3% of its revenue on dealing with historical compliance.
For businesses that have a lot of customers in high tax states, the figure can exceed 11%. This is revenue that your business could otherwise spend on hiring or investing in other areas. The good news is that this cost is easily avoidable, which brings us on to our next point.
The path forward
Sales tax non-compliance is an expensive and unnecessary burden on your business, and in worst-case scenarios, it can derail an acquisition or IPO. If not addressed quickly and decisively, it costs meaningful time and money.
With the introduction of the economic nexus in 2018 and the ever-expanding definitions of what’s taxable, the sales tax landscape is only getting more complicated and burdensome. Finance leaders need modern tools to keep up with the new demands of compliance and their growing remote team.
Anrok is the only tax engine that allows you to track your physical nexus alongside your economic nexus. We allow you to record where and when you start having remote employees in any given state. If the state taxes your product, you’ll receive an alert to register in the state. This is something you can initiate directly in the product.
It’s increasingly common to face audits due to having physical employees in a state. Often, a state sees that you’re paying payroll withholding tax in a state and checks to see if you’re paying sales tax, too. Remote-first SaaS companies can no longer get away with overlooking physical presence and how it impacts tax on software. Nor should your sales tax tools.
Instead, you need a modern solution that’s specifically built to address the realities of the remote workforce. So if you’re a company with remote employees and you’re in the market for a solution to help you to tackle sales tax, you’re in luck.
Reach out to learn more about how remote work impacts you.