How does economic nexus work?
Economic nexus is triggered once a company reaches a certain threshold in sales and/or transactions in a given state.
This gets complicated fast, as each state has its own rules. Some states, like New York, take both sales and transaction thresholds into account. Others, like Alaska, require companies to reach only one type of threshold to trigger nexus. Yet others, like Pennsylvania, only look at your level of sales. And finally, some states, such as California, don’t require sales tax on software products at all.
Staying compliant in this context requires monitoring your sales and transactions across the U.S. and checking them against each state’s thresholds. It doesn’t take a CFO to see that this is a heavy lift for busy companies.
When should you worry about non-compliance?
When to start worrying about all this depends on your exposure and your risk tolerance. Three big costs of non-compliance are audit risk, revenue impact, and hiring implications.
Knowing that audits do arise, SaaS leaders may want to seek out a tool that can be the system of record for sales and transactions in each state. They may also want to consider the impact of non-compliance on the bottom line and the ability to hire. In the case of an audit, you will not only pay the tax that you would have been able to pass on to customers, but also penalties and interest. Being able to stay compliant in any jurisdiction in which your company may want to hire helps your staff stay confident in hiring anyone they see fit.
According to a rough estimate, non-compliant SaaS companies are likely to experience a ~4.3% drag on profitability. So a non-compliant company looking to grow $20M ARR in the next year will be nearly $1M in the hole. Punting the issue only means that you will be booking a liability year over year, and allowing penalties and interest to accrue.
Once you create a calculation that reflects your own pattern of sales, you’ll be able to see the exact weight of the financial burden you’ll be taking on if you fail to comply with nexus laws.
What do I do now?
To move toward compliance, start with a nexus survey to assess your exposure. Tabulate your sales and transactions in each state during a given period and compare those numbers to the state-specific threshold in each state to see if you’ve triggered nexus or are getting close to it. Don’t forget to also check for physical presence — where do your remote employees live?
When you are getting close to triggering nexus in a given state, you need to register to collect sales tax in that state. Keep in mind that it takes about a month for many states to process that registration. You should then integrate your tax solution into your billing and payment systems so tax can be calculated in real-time and be automatically included in your returns.
Anrok will do all of this for you, as well as automate filing and remittance of sales tax. Our system also tracks your required filing frequency, which can change based on your revenue growth. Finance leaders choose Anrok because of the hyper-focus on SaaS and the fact that the platform automates everything regarding sales tax from end-to-end. Reach out to learn how we can help you.
