The SaaS sales tax checklist for every company stage
Growing a SaaS business in 2024 is increasingly complex from a tax perspective. Governments around the world are rapidly evolving their sales tax and VAT obligations for digital businesses, making it harder and harder to keep up.
Whether you’re just starting your business or looking toward an exit, here are the key sales tax and VAT milestones you should look out for at any company stage.
Startup: less than $5M in revenue
With all the moving pieces of starting a new company, sales tax is probably not on your radar from day one. But there are a few key milestones to look out for in order to avoid paying out-of-pocket expenses down the road.
Hiring your first employees
If you have an employee in a US state, you’re obligated to comply with any sales tax regulations in that jurisdiction. So if any of your first hires are in a state that taxes software products, you’ll need to go ahead and register to collect sales tax with local authorities.
Making your first sales
Depending on the product you’re selling and where your customers are located, you could be on the hook for sales tax or VAT from your very first sale. Taking a few key steps can help you stay ahead of any liability:
- Collect the right customer data: Knowing your customers’ locations and tax statuses is the first step to compliance. Make sure you’re capturing accurate address information and, for international customers, VAT IDs, from day one.
- Monitor your exposure: Track each new jurisdiction where your product is taxed and where you have customers. Each will have its own specific tax laws to take into account. A sales tax platform can automate this process for you by integrating with your billing systems, and notifying you of any potential liabilities.
- Update your TOS for tax liability: Ensure that your Terms of Service include the right contractual language so that your customer contracts are clear that your pricing does not include sales tax, and that your customer will be required to pay for any sales tax charges that do apply.
As your team grows, any new remote employees or contractors have the potential to create tax obligations. Keep track of employee locations and start dates, and compare against local tax laws to assess your exposure (or use an automated solution to monitor this for you by integrating with your HR system).
Hitting a tax threshold
Beyond employee locations, you can also trigger tax obligations by selling to customers in a country, state, or even city. Every jurisdiction has its own thresholds for requiring a business to collect sales tax or VAT. In the US, it’s typically a combination of sales amount (like $100,000) and volume (like 200 transactions), while internationally the type of transaction (B2B or B2C) often comes into play.
When you’re getting close to a new threshold—like making $100,000 in a SaaS-taxing state or selling B2C internationally—make sure you have a process or tax solution in place to handle registration and compliance in the relevant jurisdictions.
You’ll also need to prepare your business and customers for the logistics of collecting tax. Work with your executive team to get buy-in and update relevant processes across the sales and product organizations.
Growth: $5M–$250M in revenue
While it’s best practice to start thinking about sales tax and VAT obligations as early as possible, if you’ve reached the growth stage without getting compliant, you’re not alone.
But delaying tax compliance can pose a material cost to your business. For the average SaaS company, back taxes, penalties, and interest add up to 5% of company revenue.
If you’re just getting started, go through the steps in the startup stage to make sure you’re covered to this point before checking off the next milestones for your business.
Addressing outstanding tax liability
For those solving sales tax for the very first time: If you’ve already passed the threshold for sales tax or VAT obligations in a jurisdiction, you still have options to avoid getting hit with a giant tax bill. Before you’re audited by a state or country, you can proactively deal with historical exposure in a few different ways.
To understand where you have liability, you can work with an accounting firm to do a one-time nexus study (typically $5–9k). Or, plug in a tax platform for a real-time map of your sales tax and VAT exposure.
Make a plan for addressing outstanding liabilities now, to get compliance squared away and bring your tax reporting up to par.
Preparing for your first financial statement audit
As your business matures, you’ll need to make sure your reporting is audit-ready across the board. On the sales tax and VAT side, you should have detailed and organized reports of your transaction history and monthly, quarterly, and annual reconciliations.
Make sure you can drill down into individual transactions when needed. A good tax platform will provide this reporting and detailed Excel exports out of the box, so you have the details you need at the ready.
Setting up your first international entity
Tax rules can change depending on the country in which a selling entity is located. Many countries also have different registration thresholds for resident and non-resident sellers.
When you open new entities abroad, you’ll need to register with local tax authorities to collect VAT on its behalf. Make sure you (and your tax platform) are prepared to monitor thresholds accurately as a local seller, and adjust any VAT compliance logistics accordingly.
Upgrading your billing system
Most businesses will utilize multiple billing and payment systems over time, which can make it hard to streamline reporting. If you’re using a sales tax platform, you should be able to connect multiple billing systems to consolidate your past and future tax data and returns in one platform.
Reaching a high transaction volume
When you’re parsing through hundreds or thousands of transactions every month, your finance team needs all the automation you can get. Your monthly or quarterly close can go much faster when you have a tax platform in place, allowing you to quickly reconcile sales tax payable across multiple systems.
In addition, having robust tools that can connect malformed addresses to the appropriate taxing jurisdiction in real time can go a long way to ensuring full compliance coverage as transaction volume increases. Your tools should surface missing address errors for audit coverage.
Scaled: Over $250M in revenue
As your business scales towards events like an IPO, sales tax and VAT compliance is non-negotiable. At this stage, you should ensure that you have the accuracy and automation of a sales tax platform to eliminate unnecessary risk and allow your team to focus on presenting your business to the public markets.
Being audited by a country or state
Even when you’re fully compliant, state or country-level sales tax and VAT audits can happen. To ensure that you are prepared and the audit doesn’t drain further resources from your team, make sure you have a fast and easy process to tie individual sales tax and VAT transactions all the way through to the returns they were remitted on and your general ledger. The ability to quickly search, run reports, and view transaction details will help make the audit run efficiently and with lower risk.
Preparing for IPO
As your business becomes a public company, the public will be able to view your financial statements for the first time, thus giving them a look at the quality of your team’s execution on complying with relevant laws. With sales tax and VAT potentially contributing to over 5% of your revenue, non-compliance will be clearly highlighted in your financial statements. Thus, it’s critical that in the years before you file for IPO, you must ensure full compliance with sales tax and VAT anywhere you’re doing business.
This includes registering in relevant jurisdictions, addressing any outstanding historical liabilities, and complying with local regulations for collecting, filing, and remitting tax. You should also have audit-ready reports for your entire transaction history on file.
Preparing for acquisition
The same standards apply for acquisition and IPO. As a true financial exit for your business, maximizing the purchase price will ensure the best financial outcome for the sellers. A key area that acquiring companies will focus on is reducing the purchase price for liabilities such as sales tax or VAT that were incorrectly managed by the sellers. This can result in material reductions in the cash and value paid out to shareholders. To avoid reductions to the purchase price, you should be able to demonstrate complete compliance with sales tax and VAT, allowing you to maximize the purchase price in the acquisition. Conversely, if your business is buying another business, be sure to review how that business has or has not complied with sales tax and VAT. There could be material costs to the acquirer if not appropriately addressed during the acquisition process. Post-acquisition, move quickly to eliminate any gaps in compliance and roll out a sales tax platform in the acquired business to eliminate unnecessary costs and risks from non-compliance.