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3 sales tax triggers for your growing software company

  • Oct 12, 2017 | John Sallese

software sales tax nexus

Software sales tax — it can be tough to wrap your head around. Even tougher once you consider this: Your sales tax obligations mirror your company. As you grow (new products, new staff, new locations), your sales tax obligations grow too.

At this very moment, your business may be engaging in activities that create nexus — the obligation to collect and remit sales tax in a state. In fact, the 2017 Avalara Sales Tax Survey for Software Companies found that high-growth software companies trigger on average nine new sales tax obligations each year.

Common sales tax triggers for software companies

Let’s look at the three most common triggers identified in the survey and why they may warrant taking another look at nexus.

  1. Staff here, there, everywhere

    You’re only as innovative as your top talent, but the best person for the job may live across the country from your headquarters. Not a problem, especially with today’s technology. In fact, many software companies not only have remote workers, they have salespeople or trainers spread here and there.

    However, having employees in a state may give you physical presence nexus in that state. And when that happens, not only do you need to register to collect and file sales tax according to the state’s
    software taxability rules, you also need to be sure your tax team can handle the extra work.

    If it seems like a good idea to institute a companywide policy on remote workers that addresses tax implications, you’re right. After all, you don’t want to let top talent slip through your fingers due to tax issues that spring up unexpectedly. And you don’t want to find out after the fact that your star employee seven states over is actually a substantial tax liability — one you may only discover through a costly audit.

    So do your due diligence first. Then hire as you see fit.

  2. New products on the horizon

    There’s nothing like debuting a new product or service — something you’ve been shepherding into existence, possibly for years. And. It’s. Almost. Here.

    But often with new products come new tax responsibilities. Different types of software are taxed different ways by different states. And by different we mean that across the U.S., there are many ways to tax software in a host of distinct categories.

    Knowing where your new product or service falls is critical to the success of your launch. If you need additional tax compliance resources to support the new product, it will impact your revenue projections.

    So be sure your tax team gets wind of your next big thing sooner rather than later. They may need time to register to collect sales tax in new states, allocate or hire resources to handle the work, and put new processes in place in your accounting system.

  3. Taking it to the cloud, looking to SaaS

    For many software companies, the cloud and software as a service (SaaS) fit naturally with their growth plans. But, again, what do the tax experts have to say?

    Some states will check the box beside physical presence nexus when you store data on servers that reside within the state. It doesn’t matter if you own the server or if a third-party cloud provider does. So going cloud could take you into new nexus territory.

    The same holds true for SaaS. Your software may be hosted on an out-of-state cloud server that creates additional nexus for you. Then there’s the matter of selling SaaS. Are you obliged to charge sales tax on the purchase price? That will depend on where you have nexus and what the state’s laws say about SaaS taxability.

Many growth initiatives at software companies have sales tax implications, and they aren’t always obvious right from the start. Which is why the nexus conversation is really never done.

It’s imperative to regularly evaluate whether you’re still current with nexus or not. It’s true for established companies. It’s true for growing startups. It’s true for everyone in the software space.

Remember, nexus triggers can be simple, they can be routine, and they can be easy to overlook. To keep your business growing, don’t let a nexus trigger go unnoticed. Plan for it like you plan for any phase of growth.

States, too, can trigger a change in your nexus. They’re constantly reexamining their nexus laws in order to optimize the amount of sales tax revenue they receive, and the billion-dollar software industry makes for a fine target.

To understand your company’s sales tax obligations in more detail, download Part 1 of The Software Executive’s Guide to Sales Tax.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
John Sallese
Avalara Author John Sallese
John Sallese has more than 24 years of tax compliance and audit experience. Before Avalara he worked at a Big 4 accounting firm, with other tax software providers, and in industries ranging from ecommerce and technology to manufacturing and telecommunications. Avalara helps businesses of all sizes achieve compliance with transaction taxes — including leading software companies such as NetSuite, Marketo, Webtrends, WatchGuard, SugarCRM, Ubisoft, Support.com, and more.