U.S Sales Tax: The Nightmare of Scaling a SaaS Business
Tags: saas, tax, compliance
Published: 2021-12-03 16:56:24

So your eCommerce business is experiencing rapid growth. You’re scaling your operations and increasing your reach across the U.S and into new global markets.  Excellent news, right?

Well, yes and no. 

One thing is for sure:  as your SaaS company scales, staying compliant with sales taxes becomes increasingly more complex, both in the U.S and internationally. The importance of prioritizing compliance cannot be overstated.

**What Is Sales Tax?**
Sales tax is a consumption tax that the U.S government charges on the sale of goods and services. Retailers generally collect sales tax at the point of purchase and then pass it on to the government. Since the birth of eCommerce, this has been a somewhat confusing endeavor, and digital goods have made it even more complex.  

In short, your business is liable to pay tax in a specific state or jurisdiction if it has a nexus there. But more on this later.

**Why is U.S SaaS Sales Tax So Complex for Scaling Businesses?**
Many factors contribute to the complexity of sales tax compliance and financial reporting within the United States, and each one is crucial for SaaS companies to understand. Let’s start with the most critical elements to get to grips with if you are scaling your business:

### Understanding U.S Nexus Legislation
**What Is Nexus**
When talking about sales tax rules in the U.S, ‘Nexus’ refers to the level of connection between a specific taxing jurisdiction and an entity. The taxing jurisdiction can be a state or a district, and the entity, in this case, is the business itself. When this connection is established, a taxing jurisdiction can impose taxes on SaaS companies.

**Types of Nexus Physical and Economic**

![Physical and Economic Nexus](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/wweriimw00s3g53v2jwx.png)

**Physical and Economic Nexus**
A physical nexus means that any business with sufficient physical presence in a specific jurisdiction must pay tax rates there. This presence includes having a property in a jurisdiction or employees working there.

Economic nexus refers to a threshold of economic activity after which a business must pay taxes in a particular jurisdiction. This is usually measured in terms of a monetary threshold, the total number of transactions over a specific period of time, or both.

**The Impact of South Dakota v. Wayfair**
As online sales increased across the U.S in the 2010s, states became aware they were losing billions of dollars of sales tax. As a result, they began to push for a new standard of compliance. 

Before 2018, nexus in the U.S generally referred to physical nexus, and you would only have to pay sales tax if you had an actual presence in a state.

However, after the judgment of South Dakota v. Wayfair in June 2018, sales tax in the U.S became much more complicated for online sellers. The Supreme Court agreed with South Dakota that states should be collecting sales tax where businesses have economic nexus. Since this precedent was set, most states have followed suit and imposed their own nexus standards. 

So, if your business sells SaaS, Software, or digital goods and services within a U.S state, you may be required to register and pay sales tax in that state regardless of whether or not you have a physical nexus there. 

Additionally, it’s essential to clarify that you are not exempt just because the transaction takes place online. If your sales exceed the nexus threshold in a state, you’ll need to pay taxes. 

It is safe to say that with all these legal changes, many businesses have had to scramble to comply with audits as states try to reclaim lost revenue.

**Differing state and District Regulations**
Currently, there are over 14,000 tax jurisdictions in the U.S, each with its own rates, rules, and regulations, making staying on top of taxes incredibly confusing and time-consuming.  

In the U.S, sales tax legislation is different in every state, charging differing base rates. Then each jurisdiction within a state can add more tax on top of that. For instance, a county could impose an additional sales tax, while a district could impose yet another tax on top of the previous two. 

This means that the total could be significantly more than the state rate would typically be. 

Different states set different sales thresholds, and they may also have different evaluation periods and registration timings. Because of these complexities, it’s essential that SaaS leaders and founders check each state’s nexus laws.

To help you better understand the complexity of global tax compliance, we have created our SaaS & Software Tax Panic Scale which you can access below.

**SaaS and Software Tax Panic Scale**

![SaaS Tax Panic Scale](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/2pp7f691tupk5xxok7i1.png)

It gives each U.S state (and many other countries, states, and provinces around the world) a score based on a range of factors, including its tax rate and tax registration complexity.

**New Products and Services**
SaaS, Software, and digital goods companies notoriously suffer from the complexity of taxability. Each time you add a product or service to your arsenal, it potentially creates complicated changes to your sales tax nexus. Software is taxed according to numerous categories and criteria, and the system hasn’t always kept up with changes in technology. 

Since products can be taxed at different rates depending on who purchased them, where they bought them from, and whether the item is taxable in a particular state or jurisdiction, this situation is destined to cause confusion and frustration for company owners, no matter their experience or business size.

**Filing Tax Returns for Multiple States**
There is simply no way around it; you must register for sales tax in every jurisdiction in which you have nexus. As mentioned before, this could mean you’ll have to keep track of different filing deadlines and requirements for multiple states. 

The frequency of filing differs in many states. Also, you may need to pre-pay part or all of your sales taxes, which may change as your sales grow in a jurisdiction.

In short, it often becomes clear very quickly that if you have nexus in many states, it may become too much to handle in-house.

**The Intricacies of Filing Tax Returns**
There is a saying, “the devil is in the details,” and it seems very fitting regarding tax. Different tax return forms require so much varying information that it can be easy for even the most competent SaaS company to mismanage this task. 

For instance, a state can reject a return for something as small as leaving off a signature, and some states require you to round amounts up, while others need them rounded down. Because of these intricacies, we caution SaaS businesses to seek the help they need to mitigate bringing this type of hurdle into managing your business.

**Example of Filing Tax Return**

**Managing Historical Liability**
Some states allow voluntary disclosure agreements, which means you can remit sales tax liability with limited look-back periods and no penalties.  But If you realize you are liable for backdated sales tax, you must have a solid plan before filing them.

To summarize, It’s always better to get out in front of historical tax liability. A good motto, in this case, is don’t ignore it and hope it will go away!

**Differing Taxable Periods**
Because individual states set their own taxable periods, some will want you to file your taxes annually, while others require you to file quarterly or monthly. Dealing with the differing taxable period requirements can be overwhelming, which is another reason for considering outside help with your taxes.   

If you are unsure if you can manage all aspects of tax compliance, it is better to err on the side of caution and ensure that knowledgeable professionals are managing this side of your business.

Read on to learn [8 Key Sales Tax Considerations When Scaling Up Your SaaS Business](https://blog.payproglobal.com/u.s-sales-tax-scaling-a-saas-business) on [_PayPro Global's Blog_](https://blog.payproglobal.com/).