5 steps to a better software sales tax strategy in 2018 and beyond

5 steps to a better software sales tax strategy in 2018 and beyond

In the software space, you want to move quickly to market with new features, updates, and products. You have to, really, to stay ahead of the competition, and having efficient processes in place throughout your organization helps support that velocity.

But, despite your best efforts, some things just have a way of dragging down business growth and productivity. Take sales tax compliance, for example. Managing sales tax doesn’t boost your revenue. It doesn’t improve your products. It certainly doesn’t help you grow.

It’s nothing but costly and time-consuming. Yet there’s still an incentive to get sales tax right. Nasty penalties could result from an audit if a state ever decides to take a closer look at your compliance. Further, mismanaged sales tax could be a red flag to investors or even halt an IPO.

Get your sales tax strategy in shape for 2018 — and beyond

So how can you get compliance right without it being such a resource drain? By implementing a future-proof sales tax strategy that can grow as your company grows.

Here are five steps to take toward developing a more efficient sales tax strategy.

          1. Understand your sales tax obligations, including nexus

A recent Avalara survey found that software companies trigger on average nine new sales tax obligations in a given year. These are the top three ways it tends to happen:

  • Hiring new staff or contract workers
  • Expanding or launching new products/services
  • Adding an online or software as a service (SaaS) model

Oftentimes such activities create new sales tax nexus for your company in new locations. Nexus is a connection between your business and a taxing authority that results in a compliance obligation, meaning you’re mandated to register with the taxing authority and collect and report taxes on its behalf. The faster your business evolves, the more connections you make that obligate you to collect sales tax in more places and on more transactions.

Key takeaway: As important as it is to understand and manage your sales tax obligations today, you also need to prepare for changing nexus obligations tomorrow. Thus your sales tax processes should be scalable. If you foresee changing nexus obligations, you’re less likely to fall behind on compliance.

          2. Know the taxability rules in the states where you have nexus

No two states have the exact same software taxability rules and rates, so you need to account for all the variations. That means, for example, taxing SaaS where it should be taxed, such as in Ohio and Massachusetts, and not taxing it where it should be exempt, such as in California and Iowa.

Key takeaway: Once you have nexus, you’ll need to have a firm grasp on a state’s taxability rules and how to apply them to your products. You’ll also need to be nimble enough in your sales tax processes to account for changing rules and regulations. They’re never set in stone. Rather, you should expect change from the states in 2018 and beyond.

          3. Identify and close gaps in your compliance

The more you understand nexus and software taxation, the more you may identify gaps in your current compliance efforts. Did you miss a nexus trigger when you hired a remote worker in a different state? Are you applying the wrong sales tax rate on your transactions in another state due to an outdated tax table? Conducting a risk assessment may help. It might also be a good time to hire a sales tax specialist to examine your nexus and other compliance efforts.

Key takeaway: Cleaning up those tax skeletons in the closet today will help set you up for successful compliance tomorrow. You always need to look sharp with your sales tax compliance in the event of an audit or other scrutiny of your company’s financial health.

          4. Plan for sales tax in conjunction with growth events  

The time to plan for sales tax is during the planning stages of your major business initiatives, whether it’s opening an office in another state or implementing digital downloads. Some initiatives will create nexus for your business in new states. Do you have a documented process for entering into and managing a relationship with a new tax authority? Other growth events will create the need for your invoicing and accounting systems to recognize a new type of transaction and tax it according to the different rules and regulations of different states.

Key takeaway: With sales tax considerations baked into your growth events, you can plan for your changing obligations ahead of time. This means you won’t have to scramble to shore up your systems or clean up your compliance going into an audit, or even into a financing event or exit strategy. Remember, sales tax factors into your company’s overall financial health so it’s worth planning for.

          5. Rethink the role technology plays in sales tax

If you have nexus in several states, it can seem like a fool’s errand to try to stay on top of changing sales tax rules and regulations with manual research. The majority of respondents in the Avalara survey task in-house resources with the responsibility, and one-fifth rely on third-party advisors. So it’s no wonder that, according to the survey, 7 out of 10 software CFOs want to reduce resources spent on tax-related activities as part of their efficiency goals. In lieu of manual sales tax management, many software companies are turning to reliable tax automation solutions that instantly apply the right sales tax rates and rules to both digital and tangible goods and services.

Key takeaway: Your accounting team has better things to do than track down sales tax rate changes, and your IT department has bigger things on its plate than implementing those changes throughout your accounting and billing ecosystem. By replacing manual processes with automated workflows to handle sales tax calculations, exemptions, and even returns or filing, you free up valuable resources for more strategic work oriented around business growth. You also go a long way in removing the human-error factor from your sales tax compliance picture.

You want to invest fewer resources in sales tax management. Yet as time goes on and your business grows, you find yourself answering to more and more tax authorities. So take steps to lessen the resource drain now. Institute a more efficient sales tax strategy that works for you today and scales with you tomorrow.

Avalara has an entire array of resources that can help you make even more sense of sales tax. Check out Part 2 of the Software Executive’s Guide to Sales Tax to explore how to operationalize your sales tax strategy now.

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