The short answer here is that your startup accountant needs to know your revenue by state to properly handle your taxes. So let’s look at why that’s the case. When you start getting to be bigger as a startup, the states want to start charging you sales tax. Also, the states in which you’re selling a lot of your products want you to start filing a state tax return.
The reason is that if you sell more than a certain revenue threshold in a specific state, or if you have people, assets, or property in that state, you have tax nexus. That means you’re going to need to file taxes with that state. To do that, your accountant needs a breakdown of your revenue by state to file your taxes correctly.
A lot of startups don’t track that, and it becomes a little messy. It makes things harder for those companies, and it can delay their tax returns, which creates stress for everybody. It can also delay your ability to capture things like R&D tax credits. Your startup will be better off if it gets that money earlier rather than later.
How should your startup track state revenue?
We recommend that our clients use a customer relationship management (CRM) system, or at least an invoicing system, that includes the addresses of your clients or customers. For example, at Kruze Consulting we use Salesforce, but there are other systems that have the necessary capabilities, like Pipedrive, Quickbooks Invoicing, Stripe, or Bill.com.
Once you have that info, especially if it’s flowing into your general accounting system, like QuickBooks Online, then it’s much easier to mine this data, and for us to determine the states you have nexus in. Your startup really needs to be up to date on your tax nexus. If you’re doing venture capital due diligence, you need to be able to produce a revenue by state report to validate that you are in tax compliance. Remember, when you go through VC diligence, and you sign on a dotted line, and take that money, you are making some pretty serious representations and warranties in the stock purchase agreement and things like that.
An ounce of prevention …
Typically, when startups don’t have this information, it’s not for a lack of wanting to do it, it’s that startups are constantly having to reprioritize things. And sometimes things like a CRM system or a tracking system for revenue by state just gets deprioritized. But if you do take care of this, it will make everything so much easier, especially on the tax side. It will also help you track sales in regional territories and commissions, so benefits your company in a lot of other ways. If you have questions on revenue by state, tax nexus, or any other tax issues, please let us know.