Financing your future?

How to reassure investors when it comes to your tax compliance

Companies need capital to grow. But backing a venture is a big decision — a risky one — and investors don’t fund deals without first doing their homework. For any financing event, public or private, investors not only look closely at how you plan to grow the business but also how you’re managing it now. This includes tax compliance and audit histories. Follow these best practices to present your business in the best light to investors.

DON’T: Have a checkered tax past

It’s easy to underestimate the impact of sales tax on company valuation, especially for a growth-focused business like yours. Understandably, your focus is on what you think investors want to hear — revenue projections, market opportunities, new product offerings — the secret sauce that makes your venture a smart bet. But business investment is a lot like home buying; fancy interior features don’t mean much if your foundation is faulty. That includes shoring up tax compliance, advises Lisa Serwin, financial consultant and strategist at Nina Capital. “If there is a funding round, company sale, or IPO, being clean and consistent and having an auditable record is of the utmost importance,” says Serwin.

Don't let sales tax exposure be an obstacle to company valuation or investor interest. If your company is looking to sell or seeking outside funding, staying on top of potential exposure helps you avoid problems and keep cautious investors happy.

DO: Keep up with tax law changes

High-visibility events like funding rounds and initial public offerings can also bring your business to the attention of state auditors. Many times, higher profile or higher revenue companies are the businesses targeted for audits or additional scrutiny, according to a blog post from Zeni, a financial insights and services team based in Palo Alto, California. 

It’s important to assess changes in your business that could lead to changes in your sales tax obligations, especially in light of economic nexus laws now in effect in every state with a sales tax plus Puerto Rico, Washington, D.C., and some localities in Alaska. These laws were rapidly adopted following the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., which overruled the physical presence requirement in favor of allowing states to require businesses to register, collect, and remit sales tax on remote sales if certain sales volume or revenue thresholds are met.

These nexus laws affect most sellers in some way, but for growing businesses, the likelihood is much higher that your tax obligations will change, possibly substantially. And there’s little reprieve if you fall behind. Several states have nexus discovery units within their revenue departments that scour public information to find companies that are not compliant with their laws.

To avoid frequent reassessments of tax risk or, worse, failing an audit altogether, it’s imperative to have a tax compliance plan that scales with your business, factoring in funding rounds, mergers or acquisitions, and growth-related activities, and addressing any new tax responsibilities that result from those activities up front.

DON’T: Get too creative with your capital

How you plan to use financing also has tax implications. Hiring remote sales staff; adding new products, services, or sales channels; putting money in product development or research — all of these growth activities can change or add to your sales and use tax compliance requirements. Some of these changes can be beneficial to your business. For example, some states, including California and Texas, offer a partial sales and use tax exemption for equipment used in research and development. 

But knowing when you qualify for these exemptions — and where you qualify — can be difficult to discern. Exemption criteria can differ widely by state, and fast-growing companies typically have obligations to collect and remit sales tax in multiple states. It’s a lot to ask internal teams to be experts on every state’s tax rules or make judgment calls about what’s taxable and what’s exempt.

DO: Automate tax for added assurance

As you grow, the work required to get you — and keep you — tax compliant may be more than your team or current tax solution can manage. This is the tipping point when automation becomes critical. According to Flexera, 91% of enterprises use the public cloud, while 72% use a private one. As of 2020, 80% of small businesses and 99% of midmarket organizations use cloud services, according to research from Techaisle. Across all segments, it makes sense to extend your organization's cloud strategy to tax compliance.

Most high-growth companies operate in the cloud, so putting tax management there is a natural extension of that strategy.

Be smart about your choice of providers. Choose tax automation software that integrates easily into your existing ERP and ecommerce systems. Also, consider the maturity of the solution, its capabilities across all areas of tax compliance, and its fit with your business needs as you grow.

In a recent report, IDC MarketScape: Worldwide SaaS and Cloud-Enabled Sales and Use Tax Automation Software for Small and Midsize Businesses 2021 Vendor Assessment (doc #US47987521, October 2021), IDC named Avalara a Leader. The IDC MarketScape report recommends Avalara to companies “growing and encountering SUT tax management challenges, such as navigating regulatory change, beginning an omnichannel ecommerce strategy, facing new product expansion, or selling in new geographic areas.” Avalara cloud-based tax solutions directly address the events or triggers growing businesses experience that can lead to new or expanded tax obligations.

Having dedicated sales tax software working in your financial systems shows investors you’re serious about getting tax compliance right. And that confidence in your compliance may be just what seals the deal.

While we hope you find this information valuable, this is not a substitute for tax advice from a certified tax professional. If you’re unsure of your tax liabilities, please contact a tax expert.

About Avalara
Avalara helps businesses of all sizes get tax compliance right. In partnership with leading ERP, accounting, ecommerce, and other financial management system providers, Avalara delivers cloud-based compliance solutions for various transaction taxes, including sales and use, VAT, excise, communications, and other indirect tax types. Headquartered in Seattle, Avalara has offices across the U.S. and around the world in the U.K., Belgium, Brazil, and India.

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