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The truth about your sales tax engine: 5 ways it falls short

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Last Updated

The truth about your sales tax engine: 5 ways it falls short

Anrok | Streamlined sales tax for SaaS

Doing business online has gotten a lot more complicated starting in 2018 when the US Supreme Court introduced economic nexus in 2018. The pandemic and the rise of remote employees have only served to complicate your business footprint and thus sales tax obligations further.

Falling out of compliance, even if unintentional, risks tax liabilities and compliance costs piling up and overshadowing your business operations. The more places you sell and the more customers you have, the more work you have to do, as sales tax regulations vary by state, county, district, and even city.

Companies often turn to a sales tax engine to manage the minutiae of tax codes. But chances are, your engine isn’t giving you the full picture. Many engines miss (or charge more for) components that can make or break your compliance.

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Anrok | Streamlined sales tax for SaaS

What to look for in a sales tax solution

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Table of contents

Let’s look at the five key features you may be missing out on.

1. Physical presence

If you operate online or interstate, your sales tax obligations are far more complex than a mom-and-pop corner shop. Many finance leaders are struggling to wrap their arms around the new rules of economic nexus introduced in 2018, but overlook the original sin - physical presence. If you take away one thing from this blog post, a single remote employee triggers physical presence in the state. This means if the product you’re selling is taxable, you need to start collecting sales tax and remitting in the state.

When you’re talking about warehouses and storefronts, the math is simpler. If you’re hiring remote employees around the country at the speed of a venture-backed startup, tracking physical nexus becomes an operational nightmare.

In our increasingly remote modern economy, your company’s remote workforce and thus physical presence is just as crucial as your economic nexus. The best tax engines will allow you to account for both and alert you when a new hire has triggered a sales tax obligation. This is crucial to keep a full picture of where you stand come tax time.

2. Home rule jurisdictions

A home rule jurisdiction is a county, city, or municipality that charges taxes separately from the state. These self-administered local tax authorities manage tax rules, collection, and compliance independently from state or federal authorities. To put it in layman terms, home rule jurisdictions can determine how a product is taxed, sometimes in a different way to the state.

One notable example of a home rule jurisdiction is the city of Denver, Colorado. While Colorado state doesn’t tax SaaS products, Denver does. Finance leaders at software companies can’t assume policies in local jurisdictions match the state, adding another layer of complexity to accurate compliance. To complicate matters further, the city of Boulder in Colorado only taxes software sales when the seller has an office or remote employee in the city itself.

Because home rule jurisdictions can affect your tax liability, it’s essential to work with a sales tax engine that accounts for all relevant jurisdictions. Understanding applicable tax regimes applies not only to the taxes charged, but unique return forms, filing periods, and payment requirements. The best tax engines help you monitor, calculate, file, and even remit at the local home rule level.

3. Intelligent integrations

Growing SaaS companies often have complex billing and payment processes composed of multiple systems. Your billing system might start as Quickbooks and eventually graduate to NetSuite, your payments system comprises of ACH as well as Stripe or Braintree, and then you realize you also need Chargebee and Salesforce to manage subscription invoices too. Your tax engine will need to be able to reliably coordinate with all of the systems that modify invoices or charges.

For instance, consider invoices. After creating invoices, you can change them by voiding, discounting, or even refunding a sale, among other changes. Not all tax engines pay attention to each touchpoint within a single integration that could modify the invoice. This could lead to a refund in your billing system to never be reflected in your tax engine and thus returns. You need a tax engine that reacts to each of these events and has the flexibility to update transactions to sync properly.

Streamlining and testing invoice billing processes is important. Don’t forget to make sure that your tax solution can keep up with your subscription and invoicing model.

4. Simplified onboarding

Using new software comes with a learning curve, but it doesn’t have to be steep. Legacy tax automation engines come with confusing configurations prone to user error. What tax code should I attach to my product? Which past transactions should be included in my first return?

Without a user-friendly wizard to help walk you through how to backfill historical data, you’re stuck in the stone ages. A modern solution should pay attention to the details of tax end-to-end so you don’t have to.

5. The complete package

Another way your tax engine may fall short is simply by gating their product features. While many tax engines provide basic calculation functionality, you often have to purchase add-ons to ensure full compliance in all jurisdictions.

Take sales tax exemption certificates. While sellers must charge sales tax in the appropriate jurisdictions, most locales provide exemptions for non-profit or government organizations on their purchases.

As a business, it’s your job to collect exemption certificates from customers, factor it into your tax calculations, and store the information for later interactions. Last thing you want to do is to track this all manually. Tax-exempt sales can throw a wrench into your compliance efforts – especially if your tax engine charges extra for processing and managing tax-exempt customers.

Turn tax compliance into a revenue generator

Having a full-service tax engine that accounts for the nuances of individual tax jurisdictions relevant to SaaS is crucial to running a fast-growing compliant business. If your tax engine falls short, you may find yourself missing crucial features, dealing with angry customers, and paying more to cover add-ons.

The average SaaS business that falls out of compliance with sales tax can expect to spend approximately 5% of its revenue dealing with historical compliance issues. Businesses that have customers concentrated in higher-taxed states may see losses as high as 11%. That’s money that should be collected from the customer but is instead coming out of your pocket. For fast growing SaaS businesses in today’s competitive environment, being able to reinvest that money into business growth, new hires, or product development is a major edge.

Anrok has everything you need in one engine

The complex demands of modern tax jurisdictions can place excess strain on your business – if you don’t have a full-service tax engine at your back. Using Anrok, you don’t have to worry about not knowing how to get started or falling out of compliance.

We’ve built our engine from the ground-up to serve the needs of Internet and SaaS companies. From detecting exposure and applying accurate tax rates to integrating seamlessly with your financial stack, we’re dedicated to easing tax compliance. In fact, we’re the only tax engine that tracks your physical nexus for you!

That’s not all we do. We automatically record sales to generate returns and even take care of the filing and payments for you. With Anrok, you can focus on building your business, while we have your sales tax compliance covered. Learn more about our product by seeing a demo.

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