Why Startups Should Outsource Sales Tax Compliance

Sales tax compliance is easy. Said nobody. In this post, we’ll help you consider outsourcing sales tax compliance for your startup or business.

Sales tax is state mandated. But not all states levy the tax (at the state level). Tax rates by state are not uniform. Nor are the criteria for levying taxes. And the laws are changing frequently!

For example, if your business sells state tax eligible goods in South Dakota in excess of $100,000 or your business completes 200+ transactions in-state, your business is required to collect sales tax. In California the minimum threshold is $500,000…with no criteria related to the number of transactions. Whereas in New York the threshold is $500,000 AND 100+ transactions. 

Geez. I’m confused already. And those are the laws across three states only.

Surely, your young start-up or small business can’t be expected to follow these complex rules & regulations, right? WRONG! Scour the internet to find precedent legal cases - against both big and small businesses - with substantial fines and, in some cases, prison time!

Enough fear mongering. The good news is that there are several amazing software platforms that help manage your sales state tax requirements. In this article we’ll highlight the key components of sales tax compliance, offer insights on some of the available tools and provide recommendations on how to manage your state sales tax compliance efficiently, cost-effectively and with confidence.

Understanding Sales Tax Compliance: The Basics

Sales tax is a state-mandated tax imposed on the sale of tangible goods and certain services (including Software-as-a-Service…in some states 😀). The tax is typically expected to be collected by the seller (and then remitted to the appropriate taxing authorities; the vendor acts merely as the collection agent). The laws surrounding state sales tax are ever changing, making it increasingly important to stay on top of state & local regulations where you do business. Below are some of the key components of identifying if and what your state sales tax burden may be.

1. State-mandated: Review the state and local sales tax laws & regulations where you intend to conduct business to ensure understanding of what is vs. what is not deemed eligible for state sales taxes, what jurisdictions require the levying of sales tax, how to remit collected sales tax and what amounts to collect. It’s important to ensure your business is appropriately registered in the states and local jurisdictions where you are conducting business.
2. Nexus: The legal connection between business and taxing authority that establishes a taxable mandate. Determining nexus with a taxing authority can happen in several ways, such as having a physical presence or meeting certain economic requirements in a specific jurisdiction. Prior to 2018, all 45 states that levied sales tax did so based on a business having a physical presence in the state they were selling. After a landmark case (involving major online Retailer, Wayfair) in 2018, the majority of states now impose economic nexus laws when determining eligibility for state sales tax.
3. Economic Nexus: State economic nexus is determined primarily by two key factors: (1) total amount of gross receipts and (2) total number of transactions.
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   • Total amount of gross receipts: The amount of annual sales in state used to determine economic nexus for state sales tax compliance typically range from $100,000 to $500,000
   • Total number of transactions: In the majority of states, 200 or more transactions will trigger economic nexus, except for New York, where the limit is 100 transactions.
Note that states apply their economic nexus thresholds differently and it’s important to understand the nuance when determining if your business has economic nexus in a specific jurisdiction. In some states, economic nexus isn’t triggered until and unless you meet thresholds for both key factors, one specific threshold or either of them.
4. Remittance responsibility: State sales taxes are levied by the state and are, generally, collected and remitted by and from the business vendor. Sales tax is not a revenue or margin generator for a business. The business is simply collecting the tax levied - on behalf of the jurisdiction - and remitting the payments back to the taxing authority. In the event that a business generates revenue in a certain jurisdiction, but does not meet the economic nexus thresholds, the business is not required to collect and remit the sales tax. Yet, the sales tax is still owed and due. In these situations, the responsibility of paying the sales tax shifts to the consumer, via a use tax.
5. Timing: Another important factor - again, different state-to-state - that impacts when a business is required to collect and remit state sales tax is the timing of when the business meets economic nexus requirements. Some states impose immediate requirements on collecting and remitting sales tax as soon as establishing nexus, while other states allow the business to defer the collections and remittance process until a specific period in the future. It is important to track your sales and transactions volume on a month-to-month basis to determine nexus in the states you do business. Most states do not enforce sales tax collection retroactively unless the business was purposeful in avoiding compliance.
6. Goods vs. Services: Traditionally, sales tax has been levied on tangible goods and products (e.g. clothing, electronics, etc.). In some cases and states, sales tax is levied on services. The sales tax landscape has been disrupted by the digitization of business leading to recent changes in levying sales taxes on digital products, such as streaming services and / or digital advertising. Software-as-a-Service, or SaaS, has also entered the states sales tax realm, whereby some states deem these services to be taxable while others do not; oftentimes, the requirement on SaaS sales taxability is based on whether the product is canned (prewritten and off the shelf) vs. customized.

TLDR: Sales tax compliance comes in many different forms because it is administered at the state level. Because of the ever changing landscape, it’s important to stay up to speed with local laws & regulations as it relates to state sales tax compliance. Outsourced experts and sales tax management software platforms are a great way to sift through the muddiness.

Outsourcing Sales Tax Compliance

As alluded to above, we now have (thankfully!) great software platforms that assist in managing state sales tax compliance. In this section, we’ll touch on some of these software solutions and how to go about assessing & selecting the solution that fits your business needs best.

When selecting the right solution for your business, think through this short checklist as you assess your options:

• What is the implementation lift on my business and teams?
• Does the solution offer expertise beyond the management platform?
• Does the solution address my specific state sales tax needs for my type of business?
• How does the solution manage compliance risk? Is the solution a true partner when dealing with state & local jurisdictions (say, in the event of an audit)?
• Does the solution integrate seamlessly with other systems (accounting software, etc.)?
• Is the solution easy to use and intuitive (remember, a system still needs to be managed!)
• How much does the solution cost?

Below we’ve spotlighted a few of the software solutions most used by start-ups and small businesses for sales tax management. Note that this is not an all-inclusive list, nor are these recommendations for any specific solution. Book time with Afino to complete a software solution assessment to find the provider that best suits your needs! Our team has experience negotiating deep discounts on behalf of our clients.

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The Path Forward for Startups and Established Businesses

State sales tax compliance is hard. Don’t go at it alone. 

If you’re part of a growing business with expansion aspirations, the last thing you want to think or worry about is managing & ensuring compliance with state and local taxing authorities. 

That doesn’t mean you simply forget about sales tax compliance or kick the can down the road. Not recommended! Build a state sales tax compliance plan today. Surround yourself with seasoned experts and management software solutions that give you the confidence your business is compliant. Free up your time to focus on the rocket-ship-growth-enabling aspects of your business.

Find the optimal solution for your business & industry today, that seamlessly integrates with your existing systems (without a major implementation lift), provides you the confidence that your business risk is managed compliantly (with expert partners, as needed) and has a UI & UX that aligns with your team skillsets, all at a price that fits your budget. 

Book time with Afino today for help assessing & finding the right solution for you and / or to help manage & optimize the existing solution you have in place. We’re here to help!