Saas Sales Taxes for Startups 101

Kruze’s SaaS Sales Tax Team has the experience and technology to keep SaaS businesses in compliance with complicated Sales Tax regulations. Our process leverages best in class technology to not only assess the current situation, but to also monitor and suggest proactive steps to stay in compliance. Our team will:

• Mapping your SaaS sales tax nexus. We create a comprehensive nexus analysis of your SaaS business, subscription revenue, and user base to determine where you’re subject to sales taxes on a state-by-state basis.
• Create a SaaS sales tax compliance plan. Based on your tax map, we’ll outline the states in which you need to register, register your SaaS startup with the appropriate states, and set up a schedule to file sales tax returns and make payments.
• Resolve any issues with unpaid tax. If your SaaS startup has any existing sales tax issues, we will work with you to address them. Many states have voluntary disclosure programs that offer full or partial amnesty to SaaS companies that are filing for the first time.
• Set up SaaS revenue and invoicing systems. We’ll recommend tools and resources that you can use to stay compliant with SaaS sales tax regulations.
• Monitoring. Our team (and software) will actively monitor your revenue and user base to understand if new filings and tax collections are needed.
• File returns and remit payments. We’ll file your SaaS sales tax returns for the states where you have nexus, and ensure your payments are accurate and on time.
• Track your obligations and adjust as needed. SaaS sales tax laws change and evolve, and your SaaS startup will grow. We will adjust your plan for any changes in existing tax obligations, and work with you to add states as your SaaS sales increase.

If your startup is ready to start making sales or already selling products, it’s important that you prepare to deal with sales taxes. Talk to us today!

At some point your venture capital-backed startup will have to start filing Saas sales tax. When and how much will be different from state to state. 

In most states the threshold is $100,000 in annual sales, but that can change. Some states have also set the number at $500,000 while others have chosen $250,000. Smaller states tend to have a lower threshold so they are able to pick up more sales tax revenue. 

But typically, most startups are in the danger zone at $100,000. At that point, most startup accountants, like Kruze Consulting, will conduct a sales tax nexus study, which helps you figure out where you have exposure, and when you will need to start filing sales tax.

Also, your revenue level is just one of many factors that will trigger the need to file Saas sales tax. 

Let’s take a look at the other factors that can trigger Saas sales tax. 

For those startups that are running a marketplace business, it’s important to understand whether the state in which they do business is including marketplace sales. If marketplace sales are included, then business owners are only getting like 5-10% value out of a sale. 

For instance, if a customer buys a $100 item on your marketplace, you may charge a 5-10% fee to facilitate the transaction. If you are responsible for the sales tax on that item, it can eat up the profit margin pretty quickly. 

So it’s important to talk to your startup accountant and be clear on the sales tax rules of the state in which you’re doing business. 

Sales tax collection for transactions made through Apple’s App Store or Google’s Play Store is generally not the responsibility of startups or individual app developers. In general, according to the terms of service for these platforms, Apple and Google act as the merchant of record and own the customer relationship. This means that they are responsible for calculating, collecting, and remitting the sales tax to the appropriate jurisdictions - which they tend to do quite competently. So if your SaaS app sells 100% through these app stores, you shouldn’t have to worry about sales tax .

However, for companies that also make direct sales in addition to their app store sales, it becomes more complex. The inclusion of marketplace (like App Store or Google Play) sales in the threshold for sales tax nexus depends on individual state laws. Some states may require these sales to be included in the calculations for establishing a sales tax nexus, even though the taxes themselves are being collected by the marketplace. So if an app developer also has direct sales, consult a tax professional like Kruze to understand their sales tax obligations. You may owe taxes on your direct sales!

In the wake of the Supreme Court’s decision in Wayfair v. South Dakota, individual states are now able to tax startups that have a physical presence in their states, as well as startups that sell more than the state’s product or revenue thresholds.

It’s easy to see how this becomes a complex compliance burden to startups. Depending on your sales footprint, you may have to submit tax filings in dozens of states. And every state has different rules and tax thresholds. 

At Kruze Consulting, we often recommend our clients use Avalara, a SaaS tax compliance software solution that can track your sales by state, calculate your tax obligations, and even help you submit payments. Avalara’s robust and comprehensive solution connects with more than 1,000 different systems, and it’s great for startups that need to simplify their state tax compliance process

While your startup could owe sales taxes in different states based on the amount of business you do there, you could also owe income taxes. Like sales tax nexus, income tax nexus thresholds differ from state to state. The factors that affect income tax nexus include sales, as well as property or payroll within a specific state. For more information see our state income tax nexus map.

Sometimes startups might consider changing their state of incorporation to take advantage of different tax breaks. This is different than registering to do business in a state where you have tax nexus. For example, sometimes a startup might want to change states to take advantage of the R&D tax credit for another year. However, that doesn’t work, and changing your state of incorporation is not really a good idea.

FIND OUT MORE