Complying with sales tax laws in the United States is not a simple process. It is particularly difficult for SaaS businesses to keep up because each state and local jurisdiction has unique guidelines for compliance.
The tax rates, filing processes, date of remittance, and other vital factors are decentralized and determined by local tax authorities. This creates more complexities for growing SaaS businesses with a broad customer footprint.
As a growing SaaS business, the best way to meet up with sales tax obligations is by developing a systematic approach to your compliance process. Without a sales tax compliance checklist, it is easy to overlook or miss vital information that may affect your compliance.
By developing a comprehensive sales tax compliance checklist, you can simplify your processes and ensure you do not miss out on any detail that may result in historical sales tax liability.
In this article, you will learn how to create and implement a comprehensive sales tax compliance checklist. You will also see how technology can help you simplify this process. Keep reading to discover the critical elements in a compliance checklist.
Key highlights
- SaaS businesses need a sales tax compliance checklist to help them monitor their compliance process.
- Recording sales transactions, identifying economic nexus points, collecting sales taxes, and remitting to the relevant tax authorities are all critical elements in a detailed sales tax compliance checklist.
- Your compliance team should include the CFO, tax experts, and accountants. These individuals are responsible for implementing the sales tax compliance checklist.
- A comprehensive sales tax compliance checklist will help streamline the compliance process, ensure the accuracy of sales tax figures, and aid in timely remittance.
- Using a sales tax compliance solution will solve all your sales tax compliance problems.
Understanding your SaaS business and sales tax obligations
SaaS sales tax is a consumption tax levied on software products and services by state and local jurisdictions in the United States. This levy is calculated as a percentage of the subscription price of the software service and collected as part of the total payment at the point of sale.
Why do SaaS companies pay sales taxes?
In 1992, the Supreme Court set a precedent in the “Quill Corp VS North Dakota” case. This judgment stated that only businesses with a “physical presence” in a state may collect and remit sales taxes.
This ruling meant that companies (mainly SaaS businesses) that delivered their services through online platforms only had to pay sales taxes in states with a physical presence like employees, offices, stores, and so on.
This status quo changed after the Supreme Court judgment on “South Dakota VS Wayfair” in 2018. Two years prior, South Dakota passed a law mandating companies with an “economic nexus” within the state to collect and remit sales taxes.
Wayfair (an online retailer) sued South Dakota, and the case eventually landed at the apex court. In 2018, the Supreme Court ruled in favor of South Dakota. Today, SaaS businesses collect and remit sales taxes, and there are several consequences for non-compliance.
Establishing economic nexus
One primary requirement that determines whether a SaaS company is eligible to pay sales tax is called economic nexus. Economic nexus refers to the level of business activity that a company must have in a state before they are required to pay sales taxes. Before 2018, nexus was only established when a business was physically established (stores, employees, offices) in a state.
Economic nexus is established when you have a significant presence in a state or local jurisdiction. Once you meet or exceed certain thresholds, you must remit sales taxes. According to the “South Dakota vs. Wayfair 2018” judgment, you establish economic nexus in a state, for example, when you;
- Generate up to $100,000 in revenue and/or
- Process up to 200 transactions in a year
Taxability across US states
States have unique economic thresholds, and they do not all adhere to the abovementioned requirements. For example, the economic nexus threshold in New York is $500,000 in revenue and 100 or more transactions. The sales tax rates also differ from state to state. For instance, New York levies a 4% sales tax charge, Texas levies 6.25%, and Arizona levies 5.6%.
The taxability requirements are different for every state, making it more important to create and use a detailed sales tax compliance checklist. Also, the jurisdictions under these states (counties, cities, districts) administer their own sales tax rates.
Key elements of a SaaS sales tax compliance checklist
A practical sales tax compliance checklist should include all the necessary details to help you monitor your compliance process. It needs to be current with current tax laws and relevant to your unique business needs. This section will discuss the key elements that should be included in your sales tax compliance checklist.
Key Elements of SaaS Sales Tax Compliance
Record all sales transactions
The first item on your sales tax compliance checklist should be a comprehensive record of all sales transactions. You need to know the total amount of money you make and where that revenue comes from. For sales tax compliance purposes, your sales records should have the following elements, among other things:
- Date of Sale
- Name of Customer
- Details of product/service sold
- State
- Customer Address/Zip Code
- Sales/Service Charge
The details of the product or service sold will help you know if you can claim exemptions in a particular tax jurisdiction, while the customer address will pinpoint the exact location where you are making the sale, creating economic footprints.
When you record your sales transactions this way, it becomes easier to sort them by state and jurisdiction. This will help you identify economic nexus points faster and serve as a good reference source when conducting sales tax audits.
Identify nexus points
The most important task on your sales tax compliance checklist is the identification of economic nexus points. You need to monitor the states and jurisdictions where you make the most sales, so you know when you've hit the nexus threshold. Knowing where and when to collect sales taxes will save you from historical tax liability.
You can identify nexus points through the collaborative efforts of your sales and tax teams, or you can do it with a simple tax automation software. This section of your sales tax compliance checklist should contain the following:
- States/Jurisdictions (where you have made sales)
- Total Sales Figure (per State/Jurisdiction)
- Total number of Transactions (per State/Jurisdiction)
- Nexus Threshold
- Nexus Formed
For example, let's assume you are a SaaS company, and most of your customers live in Texas and New York. Your sales tax compliance checklist (economic nexus identification) will look like this:
| State | Total Sales Revenue | Number of Transactions | Nexus Threshold | Nexus Formed |
|---|---|---|---|---|
| New York | $725,000 | 190 | $500,000 in gross sales and 100 or more transactions | Yes |
| Texas | $409,000 | 115 | $500,000 in gross sales | No |
Another essential point to note is that physical presence automatically creates a nexus in a tax jurisdiction. If you have employees, offices, stores, or warehouses in a particular state, you must comply with its sales tax laws.
Register with concerned tax authorities
There are different tax rates, remittance processes, and guidelines for states and jurisdictions within the United States. To keep a comprehensive sales tax compliance checklist, you must register with relevant tax authorities per their guidelines.
For example, states like South Dakota require you to start collecting sales taxes from your customers and register with tax authorities as soon as you establish economic nexus. On the contrary, states like Alabama have a gap period. They require you to start collecting sales taxes the year after the economic nexus is established.
Collecting your customer’s home/office address at the point of sale is necessary to determine nexus and identify where you have a sales tax liability. This makes registering at the right time simpler and prevents back taxes and other legal tussles from these authorities. This section of your compliance checklist should include the following:
- States and Jurisdictions where you have established Nexus
- Sales Tax rates (State Tax Rate + Jurisdiction Tax Rate)
- Date of Remittance
- Websites of Relevant tax authorities
Know your taxability status
Sales tax compliance is complex because thousands of jurisdictions have unique laws guiding the process. As a SaaS company, your service or product might be exempt from sales taxes in certain jurisdictions. For example:
- SaaS is non-taxable in Iowa and Maryland if designed for business purposes like R&D and manufacturing.
- In New York, digital goods like online courses and e-books are exempt from sales taxes, while digitally downloaded software and SaaS are taxable.
- In Colorado, SaaS isn’t taxable at the state level, but digital goods are taxed.
- Connecticut applies the complete state rate on SaaS used for personal activities, while SaaS used for business purposes is taxed at a rate of 1%
- In Texas, 80% of your sales revenue is taxable while 20% is exempt from sales taxes.
- Online games are taxed in 23 states, while digital movies are exempt from tax in 23 states.
There are thousands of sales tax jurisdictions across the US, and you will need your tax team to help you identify where your product/service is tax-exempt.
Collect, review, and remit sales taxes
Once you establish a nexus in a state, you must register with relevant tax authorities and start collecting sales taxes from your customers. This is another important part of your compliance checklist, and it involves the following:
- Applying the right sales tax rates for each state and jurisdiction
- Collecting the sales tax as part of your total service charge at the point of sale
- Reviewing the figures to ensure accuracy
- Keep track of sales tax remittances and filing due dates for each jurisdiction.
After your Tax/Accounting team reviews your records and verifies the proper sales tax figures, you should remit them to the relevant authorities and keep the records for tax audits.
Ensure purchasers submit exemption/resale certificates where required
Another essential item on your checklist is collecting exemption certificates from qualifying vendors. If a purchaser wants to resell your goods, sales taxes will be collected from the final consumer. This means you can’t charge them sales taxes to avoid double taxation.
However, collect a sales tax exemption certificate from this buyer and document it. When tax authorities come for audits, they will want to know why you didn't charge sales taxes for these sales. Exemption certificates are your proof and one of the most important records for sales tax audits.
Keep records for periodic sales tax audits
If you can tick all the boxes on your compliance checklist, you have taken all the necessary steps to become fully sales tax compliant and tax authorities will leave you alone‚ most of the time.
However, if these authorities decide to audit your sales tax remittances, your comprehensive compliance checklist will prove your favor. Even where there is a historical tax liability, this thorough documentation will limit its effects on your business.
Implementing a sales tax compliance checklist for your SaaS business
The only way to take advantage of a comprehensive sales tax compliance checklist is by implementing it in your business. To effectively apply a compliance checklist in your SaaS business, you need to follow these steps:
Implementing A Sales Tax Compliance Checklist for Your SaaS Business
Collect and review different sales tax reports
Ideally, all your sales tax data should be in one document. However, this is hardly the case in the real world. SaaS companies grow fast, and are continuously launching new products and spreading their nexus footprint.
You may have different sales tax reports for states, jurisdictions, and products. To successfully implement a comprehensive sales tax compliance checklist, your tax/accounting team must collect, review, and incorporate these sales tax reports to reflect every detail.
Create and maintain a sales tax calendar
A sales tax calendar contains the due dates for sales tax remittances. Here, you highlight the due dates of states and jurisdictions where you have sales tax obligations. Also a detailed sales tax calendar will also contain the due dates for all tasks on the compliance checklist.
With this calendar, you can easily schedule tasks for your team members and track their progress. This makes it easier to implement your compliance checklist and keep up with sales tax obligations.
Monitor and update the checklist with new sales tax laws
Sales tax laws are constantly changing, and you need to ensure that your checklist stays updated with any new information. Monitor the sale tax laws of states and jurisdictions where you operate regularly, and apply any changes to your compliance checklist immediately.
If your SaaS company has a wide customer footprint, you may need to hire tax lawyers to help you keep an eye on changing sales tax laws across hundreds of jurisdictions.
Improve your checklist with time
SaaS CFOs are responsible for managing the compliance checklist from start to finish. After ensuring your team delivers on the vital elements on the list, you must document the process and keep adjusting it until the checklist runs smoothly.
Your sales tax compliance checklist is a standard operating procedure (SOP) document. If you experience a lag in efficiency at any point, it is the duty of the CFO to recommend new operational methods for the checklist and update your team members on these changes.
Importance of a detailed sales tax compliance checklist for your SaaS business
Meeting up with your sales tax obligations as a growing SaaS company can be difficult. It is necessary to have a detailed compliance checklist to monitor the compliance process. Here are some of the reasons why it is important to have a sales tax compliance checklist.
Why Your SaaS Business Needs a Detailed Sales Tax Compliance Checklist
Prevents tax exposure
Without a detailed sales tax compliance checklist, it takes time to identify where and when you have established economic nexus. When you do realize there is already tax liability. In some cases, this tax exposure may build up and prevent investors from acquiring or merging with your SaaS company.
Streamlines processes for efficiency
The sales tax compliance process is complicated and often takes longer than expected. With a comprehensive compliance checklist, you know precisely where you are in the compliance process and the following steps to take at any time. A to-do list reduces the time it takes to stay compliant. This leads to greater efficiency in your processes.
Aids timely remittance
The best way to stay on the good side of tax authorities in the US is by consistently meeting your sales tax obligations. With a compliance checklist, you can do this faster, which means you are never late on your sales tax remittances.
Using technology to simplify sales tax compliance
Thousands of tax jurisdictions across the US, and growing SaaS companies must keep monitoring their sales tax processes to stay compliant. The good news is you can simplify the process by using innovative software.
As a SaaS company, you need an automated sales tax solution for your business. The Galvix sales tax compliance solution will help streamline your sales tax processes, save time, and conserve human resources. Here are the easy steps you need to follow to automate your compliance process fully on our sales tax compliance software:
- Step 1: Connect your systems by importing your transactions and current employee locations. This will help identify nexus and map your services to the correct tax codes.
- Step 2: Gain access to the map and see the jurisdictions where you have sales tax obligations. These areas will cover your physical offices, remote employees, and customers.
- Step 3: Get registered immediately and save yourself the stress of navigating complex government tax websites. You do not need to fill out any forms or visit any offices.
- Step 4: Collect sales tax in real-time. The amount of sales tax your customers have to pay is automatically added to their bill at the point of sale. This ensures that your sales tax figures are always accurate.
- Step 5: Auto-file your remittances and never miss a filing deadline again. Our software will prepare, file, and remit your sales taxes to the correct tax authorities in the United States.
If you opt for a sales tax compliance solution, all your sales tax problems and bottlenecks are automatically solved. You also have access to detailed digital reports, which makes auditing easier. Tax experts are an expensive hire, and growing SaaS businesses can save themselves the cost using technology.
Conclusion
A detailed sales tax compliance checklist is important for SaaS businesses that want to meet their sales tax obligations. Your checklist will show you all the steps to take and where you are in your compliance journey.
A good compliance checklist includes a record of sales transactions and a strategy for identifying nexus points. It also contains a list of relevant tax authorities and sales tax collection/remittance processes. All the details covered by your checklist will help with future tax audits.
As a SaaS company trying to stay compliant, you should know that your tax liability can quickly accumulate and lead to tax exposure. Investors do their due diligence, and sales tax liabilities can put a pin in your fundraising/exit plan.
You can prevent this from happening by using a reliable software solution. If you decide to use a sales tax compliance solution, it will deliver everything on your checklist and more!
FAQs
Does my SaaS business need a Sales tax compliance checklist?
It depends on how you implement your sales tax compliance process. If your employees are handling the process, you must provide them with a detailed checklist. It will help them monitor the compliance process and stay on track.
However, If you use sales tax compliance software, you don't need to keep a manual checklist. The software will compile your sales taxes and generate reports for your tax audits automatically.
What is a sales tax compliance checklist?
A sales tax compliance checklist is a list of necessary actions you need to take for your business to stay compliant with sales tax laws. This detailed checklist outlines a step-by-step process to help you meet your sales tax obligations at the right time and be ready for sales tax audits.
What are the key components of sales tax compliance?
The major components of sales tax compliance are Identifying economic nexus points, collecting sales taxes, and remitting to relevant tax authorities. It also involves filing and reporting your sales taxes on or before the due date to stay compliant.