Those who are selling software may never actually deliver a product to a physical address. Cloud-based software doesn’t typically have a tangible form and is often remotely hosted. So while the user is in one state, the product itself—which historically was a physical good transferred and taxed at a physical point—may be hosted and run on a server three states over. Since access to the product can be granted virtually, software companies might think they don’t need the customer address and don’t bother to collect it.
Without valid addresses for all your customers, you have an incomplete picture of your nexus and exposure, and you may face increased audit risk as a result. We go into nexus in more detail here, but the quick version is that the obligation to collect sales tax can be determined by how much revenue you’re making in a given state. This is where customer address data comes in handy.
If a state taxation agency sees that you have incomplete address data, it can decide how to fill in the gaps. One common approach is for tax authorities to apply the percentage of customers with address info in a given place to the customers with missing address info. So, if 15% of your customers are in Massachusetts, then state tax authorities there may apply 15% to the missing address transactions and claim them as Massachusetts sales.
Here’s a run-down of what you should know and what you can do about this niche-but-important topic. You'll come away with a few strategies for estimating what and where you owe for your transactions with unknown addresses.
If a portion of your records are missing address info, you’ll need to decide whether to try to fix the problem for these past transactions. You may choose to overlook them, determining that you’ll simply address the issue if you are audited and pay any assessments at that time. If you’d like to try a best-effort assessment of your tax obligations, here are some options for making a guess of what and where you owe for your unknown addresses.