SaaS companies must be particularly vigilant in tracking exposure because of how widely tax rules governing SaaS services vary by jurisdiction. There are different laws at the state, county, and city levels, and this complex scenario keeps shifting each year. As of March 2021, about 20 major jurisdictions have laws that require you to charge sales tax on SaaS, but the number of states seeking to tax SaaS is likely to continue to increase as states look for more sources of revenue.

Jurisdictions differ not only in their laws regulating SaaS taxation but also in what level of taxes, penalties, and interest rates they apply. For example, sales tax ranges from 1% to 10.5% across jurisdictions, while penalties might range from 10% to 30%, and interest rates could be anywhere from 2.5% to 20%.

When should SaaS companies make a tax hire?

SaaS companies should make a tax hire fairly early in their life cycle. Prior to changes in tax laws, companies could wait until later in their life cycle or even after an exit to hire a tax specialist. But maintaining compliance with rapidly changing tax rules in the US and around the world—especially where it comes to transaction taxes and indirect tax—requires vigilance, organization, and time. In short, having a staff member dedicated to ensuring you stay in compliance is the most likely avenue to accurate management and reduced costs.

Should I hire a generalist?

SaaS businesses typically take one of two routes in looking for their first tax hire. One is hiring a generalist to tackle a broad scope of issues, including direct tax compliance, tax credits, global mobility, and global indirect tax, among others. The other approach is hiring an indirect tax specialist to focus on implementing and managing indirect tax.

There are benefits to both options. High-growth SaaS businesses most commonly hire a generalist to manage a broad range of tax areas. Often, in-house tax generalists will work with local and global firms to ensure adequate expertise and compliance for each tax type and jurisdiction. Companies that have outgrown an outsourced model may consider hiring in-house subject matter experts on specialized tax teams.

It is critical for companies to ensure their first tax hire is empowered to leverage technology that will drive compliance, boost efficiency, and manage risk. Using an indirect tax tool like Anrok will make it easier for small or one-person tax departments to adhere to increasing regulation and manage the associated risk.