Imagine the challenge of individually monitoring the nexus threshold for the different states your software-as-a-service (SaaS) business operates in. For example, if your SaaS business has 20 customers in a state and their subscription renews from you monthly, you may have the 200 transactions threshold of that particular state. This problem is of course complicated by the fact that every SaaS business is likely selling in multiple states, if not all 50 of them in the United States.
This complexity is due to local government autonomy: states pass and enforce their own sales tax laws, with the exception of Alaska, Delaware, Montana, New Hampshire, and Oregon. While this system may be beneficial for states, it creates a complex environment for businesses: An average SaaS company now needs to keep track - and stay compliant with - multiple tax codes all at once. This includes nexus thresholds, sales tax percentages, and filing processes - since different states collect taxes in their respective jurisdictions, businesses need to file with each separately.
Naturally, growing organizations understandably struggle with sales tax compliance. While an increase in revenue is beneficial for the business, it also increases sales tax liability across multiple jurisdictions. Companies need to monitor their sales and transactions volumes per state, so that they can stay compliant, a process which may be taxing (pun intended) to their time, manpower, and effort. One study, for example, found that businesses spend an average of 23 hours per income tax filing, which is done once a year - now imagine the exponential time and effort involved for sales tax filing, which can be monthly and for multiple jurisdictions.
Given that SaaS businesses understand the value of software-as-a-service, these organizations should also turn to a SaaS that can automate their sales tax compliance. Because the shift from manual processing to an automated tool can be a major change, this article will document everything that enterprises need to know, including the complexity of sales tax compliance, the emergence of automated solutions in this space, and how automated sales tax compliance actually works. With this understanding, businesses can scale up their sales tax compliance with an appropriate SaaS, so that they can sustainably grow across all fifty states.
The complexity of sales tax compliance
Sales tax compliance can be a veritable maze for SaaS businesses. They must navigate both overlapping and independent laws and requirements across multiple states and jurisdictions. There are multiple factors that add to these intricacies, including the US Nexus Law, different state and municipal laws, tax classification, multiple registrations and tax returns, and even varying tax remittance periods.
The complexity of sales tax compliance is compounded by the fact that penalties for non-compliance can be significant. They can also materially affect the business across several dimensions.
Cash flow
Failure to collect and remit sales tax on time leads to liabilities, such as back-owed taxes and even fines. Paying these taxes and fines will demonstrate the organization's non-malicious intent, and in some cases, alleviate the severity of the consequences. These penalties should still be avoided because they weaken the organization's financial position and cash flow.
Organizations should also get accustomed to paying correct taxes on time, rather than taking penalties. For when a SaaS company grows, the depth and frequency of sales tax audits may also increase, especially if any malicious intent is proven. Since these penalties may be larger, it is best to avoid them in the first place.
Investor relations
Non-compliance on sales tax can also prevent organizations from securing investors, which will be detrimental in a capital-intensive business like SaaS. After discovering non-compliance as part of their due diligence process, investors may be unwilling to back an organization that doesn't follow tax laws. If investors are willing to invest in spite of non-compliance, they may use the issue as leverage to demand unfavorable terms, such as a lower valuation for the company.
Non-compliance can also affect mergers and acquisitions (M&A), which is the most common exit strategy for SaaS businesses. Like investors, potential buyers may be reluctant to assume tax liabilities. In the event they are, they may also use the issue to negotiate for a lower acquisition price to cover not only the back-owed taxes and fees, but the necessary time and energy involved.
Litigation
Most tax authorities would prefer to avoid lengthy and expensive court cases and simply collect the due taxes and fines, but they will resort to litigation if the non-compliance is extreme enough. If the company is found guilty, they will not only have to pay back taxes and fines, but also deal with the reputational damage, which will affect their dealings with customers, partners, investors, and other stakeholders.
The advent of automation in sales tax compliance
Revolutionizing Sales Tax Compliance with Automation
The evolution of automation can be attributed to advancements in computing power, data storage, connectivity, and algorithms. The rise of big data, cloud computing, and the Internet of Things (IoT) has given automation the infrastructure and capabilities it needs to thrive. Additionally, automation systems can now analyze data, recognize trends, and make intelligent decisions thanks to machine learning and artificial intelligence technologies.
Automation has revolutionized the way businesses operate in the digital era. It has enabled increased productivity, improved decision-making, enhanced customer experiences, and opened up new possibilities for innovation and growth. Sales tax compliance is no exception. As a business area, it can be radically improved through various forms of automation, including artificial intelligence (AI), machine learning, and the cloud.
These technologies can streamline processes, eliminate errors and improve accuracy, and comply with sales tax obligations with less time, effort, and other resources. There are several key areas in which these technologies can assist with sales tax compliance.
Centralizing tax data
A common issue facing SaaS businesses are data silos. They may have relevant data scattered across the organization, each in its own silo, which makes it difficult to access and refer to for tax purposes. One of the basic advantages of automation is centralization: Now businesses can store and manage all their transaction details, tax rates, and compliance reports in a single location. This centralization is also aided by the fact that these solutions can integrate with other relevant business systems, such as accounting or enterprise resource planning (ERP) systems.
The ability to integrate also enhances visibility and data accuracy by consolidating tax-related information from various sources, eliminating the need for manual data entry and reducing the risk of errors. Having all relevant sales, financial, and tax data in a hub simplifies data management, improves accuracy, and provides not only a comprehensive view of tax-related activities, but the foundation for all other sales tax automation.
Tax determination and classification
AI and machine learning algorithms can analyze large volumes of data relating to the company. This includes both external data, such as information pertaining to the unique tax laws of different states and jurisdictions, as well as internal data, such as transaction volumes. From there, the algorithms can accurately determine the SaaS organization's tax obligations. This classification can also be done granularly on a product or service level: An organization's core SaaS product, for example, may have different tax obligations than value-added services. Algorithms help the entire organization stay compliant with each of the appropriate tax classifications.
Data validation and error detection
Humans make mistakes, and this idea is especially true of tax compliance, where both types of error are costly. Some finance professionals may miscalculate how much tax is owed, resulting in overpayment. While overpayment may be credited to an organization's account against future taxes, it negatively impacts cash-flow in the short-term. Finance professionals also frequently make the opposite mistake in underestimating the correct amount of taxes. Under-payment can again result in fines, sanctions, and even litigation.
Given that algorithms are more accurate than knowledge workers, these technologies can identify anomalies or discrepancies, which may represent errors. By proactively spotting these issues, enterprises can reduce errors, improve sales- and tax-related data, and reduce the risk of non-compliance.
Tax reporting, compliance monitoring, and filing
These technologies can also spare finance professionals the need to manually create tax reports by automatically generating them. This is accomplished by monitoring filing periods and deadlines, any regulatory changes, and prompting the finance team on when they should submit an automatically generated report. Some solutions are even interoperable with government agencies and can send these reports directly to them. This automation reduces the burden on finance teams and minimizes the possibility of penalties.
Throughout the 2000s, automation has transformed the landscape of tax compliance. It has revolutionized how businesses operate by increasing productivity, enhancing the use experiences of finance professionals, and opening up new possibilities for innovation and growth, since teams spend less time, effort, and energy on manual tax compliance.
The mechanics of automation in sales tax compliance
The Power of Automation in Sales Tax Compliance
For finance teams accustomed to manual sales tax compliance, automation can seem like a futuristic technology. But how this automation works is understandable once you get into the nuts-and-bolts of each particular feature.
Accurate tax calculation
Automated solutions excel in accurately calculating sales tax across different states and tax jurisdictions. These systems leverage comprehensive databases that store up-to-date tax rate tables, rules, and geolocation data. By integrating with business systems like accounting software or ERP, they import transaction data and map it to the correct tax codes based on the specific jurisdiction's requirements. These automated solutions consider many factors, such as customer and office locations, the nature of the SaaS products or services being sold, as well as non-obvious ones, such as the location of remote employees to determine the applicable sales tax rate for each transaction. This ensures the sales tax is precisely calculated, across all the diverse tax requirements of different states and jurisdictions.
These automated systems can handle complex tax scenarios in a fraction of the time it would take knowledge workers. They can account for different tax rates for different items within a single transaction and adjust calculations based on specific tax exemptions or thresholds. By automating the calculation process, these systems mitigate the risk of human error and provide businesses with confidence in their tax compliance efforts.
Real-time nexus tracking
Manual nexus tracking is difficult. SaaS businesses have to pay close attention to their transactions as they accumulate toward a particular nexus threshold, which requires a significant amount of time and effort. If they do not pay strict vigilance, they may overlook a nexus and fail to comply with the necessary sales tax as a result.
With the advent of automation, nexus tracking is easier. The different nexus thresholds for different states can be tracked in real-time, and SaaS businesses can be informed not only where it is likely to establish a nexus, but when. This estimation makes it easier for SaaS businesses to plan proper sales tax compliance.
Easy and prompt registration for sales tax permit
Once a nexus has been established with a particular state, these solutions can also then automatically register the business for their sales tax permit. Traditionally, this process has been cumbersome: Businesses have to gather their relevant financial information and documentation and register individually with each state's department of revenue.
Automated solutions assume this task from businesses by routing the necessary information and requirements to the tax authorities, so that the sales tax permit is processed promptly and without delay. This way, businesses can smoothly proceed to filing and collection.
Automated tax return rreparation and filing
Automated systems streamline the process of tax return preparation and filing, making it a seamless and efficient task. By automatically populating the required tax forms with financial or sales data, these systems minimize manual data entry and reduce the potential for errors.
Once the tax returns are prepared, automated systems notify the organization's stakeholders to review and approve them. After obtaining approval, these systems automatically file the tax returns with the respective tax authorities, given that they are seamlessly integrated with their electronic systems, and remit the correct tax amounts. By automating this process, businesses can ensure accurate and timely filing, eliminating the risk of missing filing deadlines and subsequently incurring penalties.
Maintenance of audit trails and exemption certificates
Automation plays a crucial role in maintaining audit trails and managing exemption certificates. By capturing and storing transaction details, employee locations, and other relevant information, automated systems create a comprehensive audit trail. This trail helps businesses easily access and review data during audits or compliance inspections, ensuring transparency and compliance with tax regulations.
Additionally, these systems provide secure storage for exemption certificates from customers who may not be subject to paying taxes when making a purchase, and facilitate their association with specific customers or transactions. By automating the tracking and renewal process, businesses can ensure that valid and up-to-date exemption certificates are readily available. This helps minimize compliance risks and potential penalties associated with incorrect or expired certificates.
The maintenance of audit trails and exemption certificates is essential for businesses to demonstrate compliance and avoid legal complications.
Keeping up-to-date with changing tax laws
Solutions such as Galvix stay up-to-date with changing sales tax laws and rates through regular updates and synchronization with authoritative sources. These systems connect with government websites and tax content providers to stay informed about any modifications or additions to tax laws and rates, which change annually. These automated updates ensure that businesses always apply the most current tax rates and rules, reducing the risk of non-compliance.
Moreover, automated systems often provide proactive notifications and alerts regarding upcoming tax law changes. By keeping businesses informed about regulatory updates, these systems enable them to adjust their processes and remain compliant with evolving sales tax laws and rates. This saves businesses the effort of manually researching and monitoring tax law changes, allowing them to focus on their core operations while maintaining accurate and compliant sales tax calculations and filings.
The benefits of automation for sales tax compliance
In the ever-evolving landscape of sales tax compliance, automation can be a game-changer for SaaS businesses, especially in three major areas.
Simplifying compliance and minimizing errors
Humans are prone to errors, which can be costly in the realm of tax compliance. Sales tax automation eliminates the need for most manual data entry and manipulation, and in so doing, minimizes the simple mistakes that can plague filings. A tired finance professional may mistakenly refer to the "NJ" tax rate instead of the accurate "NY" one, for example. Automation reduces the risk of these errors and the associated costs of fixing them, such as paying fees on top of back-owed taxes, or losing cash flow to over-paying. Automation, in short, removes the flaws of the human hand in tax compliance.
Efficiency gains
With these solutions, tasks such as data management, calculation, and form preparation are automated, reducing the time and effort required. Accurately calculating and remitting the correct amount of sales tax across all liable jurisdictions mitigates the risk of costly fines and audits. Automation also ensures timely filing, eliminating the possibility of missing deadlines.
These combined benefits result in reduced compliance-related costs and provide businesses with not only peace of mind, but opportunity: The operational efficiency gained through automation allows resources to be allocated to higher level activities, driving overall business growth. Finance professionals can focus more on investor relations, fundraising, assisting with profitability, and other more important tasks. Sales tax automation moves SaaS businesses from opportunity costs to realizing opportunity.
Scalability of compliance
As SaaS businesses expand their customer base and operate in multiple jurisdictions, managing sales tax compliance becomes exponentially complex. Automated systems can easily handle the growing compliance requirements that come with increasing sales volumes. These systems efficiently manage large volumes of data and accommodate the complexities of diverse tax laws and rates across multiple jurisdictions. Now instead of compliance affecting or even hindering growth, automated solutions will enable SaaS organizations to focus on what matters most: scaling.
Why it's time for CFOs
The Digital Transformation Imperative for CFOs
Led by forward-thinking CMOs and CROs, many marketing and sales teams have transformed how they work through the use of marketing and sales technology. For example, marketing technology offers advanced analytics and automation capabilities, through which marketers can better track and analyze customer behavior, preferences, and engagement with precision. This data-driven approach optimizes campaigns and personalizes messaging for more impactful experiences.
Similarly, sales technology has revolutionized how teams interact with prospects and close deals. CRM systems centralize customer interactions and track sales activity and pipeline performance. Automation tools simplify tasks, including lead generation, nurturing, and scoring, allowing sales reps to focus on relationship-building.
Despite these radical changes in adjacent spaces, many CFOs have not caught on with digital transformation, electing to cling to manual processes. Given the many factors that CFOs must consider for any piece of new technology, including costs, training, and after-sales support, many are reluctant to take bold approaches to their technology stack. They are hyper-focused on advancing the organization's financial strategy.
But new technology can also serve this goal. Klaviyo's CFO Amanda Whalen recognizes technology's role in efficiency and effectiveness, freeing up time for value-added work. CFOs who embrace innovation enhance value creation, improve culture, and drive financial performance of not only their department, but the entire organization. Conversely, CFOs resistant to change may jeopardize their organization's success.
If CFOs need a do-or-die moment, there is no better time than the current economic crisis to jump head-first into technology. At this time, most CFOs will tighten their war chests, unwilling to spend capital on new solutions. But other, more progressive CFOs will recognize the opportunity in this crisis: Availing of new technologies now can improve productivity, increase their organization's competitive advantages, and even facilitate innovation. These advantages can bolster the business during the crisis while competitors contend with slow growth due to their unwillingness to invest in the right technology.
Choosing the right sales tax automation software for your SaaS business
When choosing a sales tax automation system for your SaaS business, it's essential to prioritize three things: the solution's reliability, accuracy, and scalability. To properly ascertain these qualities, go through these steps.
Reflect on your business needs
Assess your unique sales tax compliance requirements and identify the features and functionalities that will be most important to your business. This will help you narrow down your options and focus on solutions that align with your specific needs, rather than choosing one that may be ideal for other businesses but not for yours.
Examine the solution's key features
Evaluate the features offered by different software solutions. Look for features such as real-time tax rate updates, exemption certificate management, automated filing, audit trail capabilities, reporting functionalities, and integration capabilities with your existing financial systems. These features are generally essential for your business's sales tax compliance.
Test out the user experience
Evaluate the user interface and ease of use of each software solution. A user-friendly interface will make it easier for you and your team to navigate and perform tasks efficiently. Look for intuitive workflows, customizable settings, and clear documentation or training resources.
Specialization
The software should not be a general product - one that tries to be everything to everyone by taking a one-size-fits-all approach. This type of software will lack the nuance to deal with the challenges of a SaaS business. As a result, the SaaS business will likely have to spend significant resources customizing the generalist software to their specific needs. A far better strategy is to find a sales tax compliance solution that already focuses on SaaS businesses.
Conclusion
Automation has brought a transformative wave in the realm of sales tax compliance, revolutionizing how businesses navigate the complexities of tax regulations. The traditional manual approach to sales tax compliance was laborious, prone to errors, and struggled to keep pace with the ever-changing tax landscape. However, automation has emerged as the superhero, swooping in to save the day.
With automation, businesses can bid farewell to the days of tedious manual calculations, endless spreadsheets, and late evenings worrying about compliance. These automated solutions handle the mechanics of sales tax compliance with precision and ease. They accurately calculate tax liabilities across multiple jurisdictions, seamlessly prepare and file tax returns, maintain audit trails, and effortlessly adapt to changing tax laws and rates.
The benefits of automation are remarkable. It simplifies compliance, minimizes errors, improves efficiency, and enables CFOs to focus on more value-added work. CFOs, once seen as the gatekeepers of financial control, are now embracing innovation and championing the adoption of automation in sales tax compliance. They understand that automation can be a source of competitive advantage, helping them drive financial performance, company culture, and the overall success of their organization.