Companies that provide SaaS products need to take certain steps to make sure they’re compliant with any sales tax laws that apply to them. Doing that gets a lot easier when you know what those steps entail.
With that in mind, let’s go over your SaaS company’s four-point checklist for sales tax compliance.
#1: Check for a nexus
First up, you need to find out which state or local tax laws you’re working with here. That means looking at every state you operate out of and every state in which you sell. You can establish a nexus — making you subject to sales tax laws — physically or economically.
Physical nexus
Historically, this was the easier of the two nexus-hitting benchmarks to watch. If you have a company location in the state, you have a physical nexus there. That’s true whether it’s an office, warehouse, distribution center, or anything else.
But things have gotten more complicated in recent years. Remote workers have particularly muddied the waters here. If you let employees work remotely and they move to a different state, that’s almost always enough to establish a nexus for your company there.
Trade shows can also open you up to a new nexus. If you attend a trade show and take orders there, some states consider that enough to establish a nexus.
Because this can all get so complicated, it can help to schedule some time with your accountant. Go over all the states in which you have any sort of physical company location, remote employee stationed, or trade show presence.
Economic nexus
Post Wayfair ruling, selling a sufficient amount of software into another state can be enough for your company to establish an economic nexus there.
In the majority of states that charge sales tax on SaaS, selling anything over six figures in that state hits the economic nexus threshold. Some states have additional per-transaction thresholds, too. 200 or more separate transactions might be enough to establish a nexus even if those transactions total up to less than $100,000.
Total sales and number-of-transaction thresholds have changed quite a bit since the Wayfair ruling, so it’s worth staying informed about where the ceiling is in any states in which you sell. The Sales Tax Institute does a good job of keeping its economic nexus threshold table updated, so that’s a great place to start. That said, be in communication with your CPA to make sure you don’t miss an update — and a new sales tax requirement.
#2: Register with the tax authority
If you have a physical and/or economic nexus in a state, you’re legally required to register with the state’s taxing agency before collecting any sales tax. That might mean filing paperwork in quite a few different states.
Fortunately, some states have joined together to participate in the Streamlined Sales and Use Tax Agreement, or SST, for short. Basically, if a state is a member of the SST, they’re part of the Streamlined Sales Tax Registration System (SSTRS). If you’ve crossed the economic nexus threshold in three states and all of them participate in the SSTRS, for example, you would only need to register once in this system. Registering in that system licenses/permits your company to collect sales tax in the participating state.
States that fully participate in the SST are:
- Arkansas
- Georgia
- Indiana
- Iowa
- Kansas
- Kentucky
- Michigan
- Minnesota
- Nebraska
- Nevada
- New Jersey
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Rhode Island
- South Dakota
- Utah
- Vermont
- Washington
- West Virginia
- Wisconsin
- Wyoming
The SST Governing Board maintains a list and map of member states on its home page so you can figure out where this might apply to your company.
If you have a nexus in any states that don’t participate in the SST, you need to register to collect sales tax with each individual state’s tax authority. Usually, this means going through the process to get a seller’s permit.
As you go through that process, note what’s required. In some states, you only need to register initially. Other states, though, require you to renew your registration on an annual basis.
Note that with the SST, too, you do need to take annual steps to stay compliant.
#3: Collect sales tax
Once you have the license or permit required by the state in order to collect sales tax, it’s time to start collecting it on your sales.
Your CPA can help you identify the applicable tax rate based on the locations in which you’re selling. You can also use the aforementioned Anrok sales tax guide.
As you figure out how much sales tax you should be charging, don’t forget to explore exemptions. In Iowa and Maryland, for example, SaaS is exempt from sales tax when it’s sold for certain business purposes. Your accountant can help you here.
As you collect the required sales tax, do two things. First, allocate that money to a separate account so you’ll have it at the ready when it’s time to pay it forward to the appropriate tax authority. Secondly, keep a careful record of how much you’re collecting and from whom.
If a customer is exempt from paying sales tax you will need to request a resale certificate to verify their sales tax exemption status. This way you are not on the hook for collecting the tax. For SaaS providers, a resale certificate (sometimes called a “direct pay” or “reseller” certificate in the digital-goods context) serves the same purpose: it’s a legal declaration that the purchaser—often another business or reseller—is buying your software or service for resale (or as an input to a resale product) rather than for end-use. You’d collect this when, for example, you have a licensing partnership or your customer is bundling your SaaS into their own offering, so you can treat the sale as exempt rather than remitting tax on that invoice.
If you’re using a billing or e-commerce platform, you can streamline collections even further by turning on its built-in tax engines or connecting a service like TaxJar or Anrok. For example, in Stripe’s dashboard you can navigate to Settings > Tax, enable automatic sales-tax calculations for any jurisdictions where you have nexus, and map your SaaS plans to the correct tax categories. TaxJar’s connector for Stripe (and other platforms) will fetch the latest state and local rates, apply them at checkout, and sync exemption certificates. Likewise, Anrok offers native integrations that tag each invoice with the proper tax amount once you link your billing system. Be sure to review your nexus and product settings periodically—especially after adding a new state—so your platform continues charging exactly what you owe without manual tweaks.
#4: File the appropriate documentation and remit the collected sales tax
Once you start collecting sales tax, you need to get on a schedule of filing sales tax returns and remitting the money you’ve collected for this tax.
The more sales you do in that tax jurisdiction, the more frequently you’ll need to handle this. You might be required to file monthly, quarterly, semiannually, or annually, depending on your sales volume and local tax law.
Check the deadlines that apply to your business. Usually, these fall in the latter half of the month. The deadline might differ depending on how you pay, too (e.g., via electronic funds transfer [EFT] or via mailed check). Whatever the case may be, the deadline applies to both the remittance of the money to the tax authority and the filing of the sales tax return.
As with just about everything else when it comes to sales taxes, what goes in that return varies by state. In some states, the paperwork is fairly simple. In others, you need to report to a pretty granular level of detail (e.g., explain in which cities and counties you collected the tax). Your accountant can help you navigate the filing requirements here.
#5: Potential for Income Tax or Franchise Tax Considerations
Beyond your sales tax obligations, many states also impose income or franchise taxes on companies doing business within their borders. Income taxes are based on your net earnings, while franchise taxes typically function as a fee for the privilege of operating in the state—often calculated on gross receipts or a specific tax margin. Depending on where you’ve established nexus, you may need to file separate income or franchise tax returns alongside your sales tax filings. For instance, California’s franchise tax applies a minimum fee even if you’re not yet profitable, and Texas’s margin tax can catch startups by surprise if they exceed the $1M gross receipts threshold. Sitting down with your CPA early will ensure you understand each jurisdiction’s filing requirements, rates, and deadlines so you’re prepared for the full spectrum of your multistate tax responsibilities.
Pro tip: Use tax automation tools to stay compliant
In their early phases, a lot of SaaS companies can manage their sales tax compliance with the help of their CPA. As they add remote employees, office locations, and sales and marketing efforts in new territories, though, sales taxes get increasingly complicated.
At some point — which we can help you identify with some tips later in this guide — it makes sense to automate your compliance. Software options like Anrok and Numeral were designed to help SaaS companies navigate all of the complexities here. Deploying a platform like that can take a lot of the work (and stress) out of managing your company’s sales tax requirements.
Start with your CPA
Schedule some time with your accountant to talk through your company’s specific sales tax implications. Come to that meeting with a list of all of the locations in which you’re currently selling your SaaS product(s).
Your accountant can help you determine where you’ve established a nexus. Then, they can work with you to get appropriately registered, manage any taxes you haven’t collected/remitted, and get compliant moving forward. The sooner you do this, the easier and cheaper it is.
Plus, your accountant might be able to give you some good news.
We recently worked with a company that sells 3D assets used in video games. They sold an asset to a customer in Washington, which on the surface looks like it would be subject to sales tax. But the Washington Department of Revenue says, “Services that are primarily the result of human effort performed in response to a customer request are not considered digital automated services (DAS).” That meant that the custom asset fell outside Washington’s sales taxable categorization. As a result, that transaction wasn’t subject to sales tax.
Your accountant is your first line of defense against sales tax noncompliance — and headache. They can also advise you on other tax considerations. If you need to pay sales tax in a state, you might also need to pay income tax, for example. Start with your accountant to make sure you’re navigating all of these requirements in a way that protects your company.
To talk with our SaaS sales tax experts here at ShayCPA, schedule a call with us today.
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