Regular Sales Tax Risk Assessments: A Must for Every SaaS Company

SaaS companies can identify compliance gaps early and avoid costly audits and penalties by conducting regular sales tax risk assessments.

Every SaaS founder works hard to grow their business, but growth also invites tax trouble. Each new subscriber, contract, and state expansion puts you closer to crossing a threshold.

With states having different rules for digital products, managing compliance can be tricky. So, SaaS founders should regularly conduct sales tax risk assessments to catch compliance gaps before auditors do.

How SaaS Growth Triggers Unexpected Nexus Obligations

Expanding your SaaS business is exciting, but it also means new tax obligations. Whether you anticipate this or not, a spike in sales or multiple enterprise contracts could push you past the economic nexus threshold and bring you new responsibilities.

Exposes you to new compliance territory

If you expand into a new state and experience an influx of sales, you could be exposed outside your home state. That means new registration, filing, and remittance. If you‘re already registered in one state, being exposed in another state could mean going through a similar process again. The more states you’re exposed to, the more frequently you’ll have to repeat the process.

SaaS pricing models can spike revenue

SaaS’s seat-based and usage-based pricing models are designed for scalability. In seat-based pricing, every time a company expands, its subscription cost increases. In usage-based pricing, customers are charged according to the service they use, such as data storage, API calls, or transaction volume. When they use more resources, their monthly bill rises. These pricing models can trigger unplanned new obligations for any SaaS business.

Remote teams may create a physical nexus

When a SaaS business scales, it could hire new talent across multiple states or use third-party fulfillment centers for hardware or onboarding kits. Even without direct sales activity in those states, having employees, contractors, or inventory in a new state can create a physical nexus obligation. This administrative burden can grow exponentially, especially if overlooked. Yes, even if a business is fully digital, many states consider remote employees as establishing nexus.

The Hidden Risks of Sales Tax in SaaS

Sales tax rules for SaaS are quite complicated due to recurring billing cycles, ever-changing tax policies, and several other factors. Failing to maintain your compliance could result in consequences you will never like.

Unexpected nexus triggers

SaaS businesses can grow rapidly in a short time. When it hires remote teams, expands into new states, or onboards enterprise clients, it could create nexus in new jurisdictions. Triggering nexus means new tax obligations — registration, collection, filing, and remittance. Failing to accomplish this could result in back taxes and an increased risk of audit.

Audit and penalties

Many jurisdictions have utilized advanced analytics and AI-driven tools to easily identify noncompliant businesses. The system can identify compliance gaps, including inconsistent revenue reports and unregistered activities, faster than traditional methods. Worse, audits often uncover other discrepancies that could lead to amplified penalties and interest. Audits can also affect the business’s finances and brand perception.

Complex exemption management

SaaS customers, such as nonprofits and large B2B clients, claim sales tax exemptions across multiple seats or licenses. Tracking and validating these certificates is prone to error, especially when done manually. A missing or expired certificate means uncollected taxes and will be the company’s liability.

Reputational damage

Customers may question the business’s financial reliability and trustworthiness when they learn about a compliance mistake. A single error in poorly handled exemptions can strain the company’s relationship with its clients, who expect a seamless experience. Investors and potential buyers may also view compliance gaps as a red flag, which can affect your ability to raise capital or negotiate a favorable price when selling your brand.

Why Regular Sales Tax Risk Assessments Are Critical

Regular sales tax risk assessments are essential, as they help SaaS companies identify compliance gaps before tax authorities do. By periodically checking your exposure, you can ensure compliance and stay ahead of the ever-changing regulations through the following steps.

Monitors exposure

Economic nexus thresholds may vary by state (some $100,000, some higher; some use transaction counts), and they can change over time. For instance, many states have already removed the 200-sale transaction threshold, including North Carolina, Wyoming, and Utah. When you do risk assessment regularly, you’ll detect when you’re close to crossing a threshold, so you can register and start collecting taxes on time.

Detects misclassified SKUs

SaaS businesses can offer multiple products with different tax rules, like add-ons, digital downloads, hybrid services, or bundles. Regular assessments should include reviewing your product catalog to confirm each SKU is correctly classified for each state’s tax codes. By regularly reviewing your sales tax product classification, you can identify misclassification if there is any.

Validates exemption workflow

SaaS companies often handle exemptions from nonprofits, educational institutions, and large enterprise clients. Through regular risk assessments, the company can ensure that exemption certificates are current and valid. By doing this, SaaS can avoid penalties from expired and missing exemption certificates.

Strengthens audit defense

Before auditors arrive at your door, a detailed and current risk assessment will show how your company actively manages compliance. Your organized approach not only reduces audit scope but also builds your credibility with tax authorities.

Supports confidence when scaling

When a SaaS company expands into new markets or states, its tax obligations become increasingly complex. It’s easy to overlook a registration in one or two states. However, proactive nexus monitoring lets you scale without worrying about any compliance gaps.

Automating Risk Assessments with Kintsugi

Kintsugi is one of the rising sales tax automation platforms in the market. Customers love Kintsugi's intuitive design and easy onboarding process. But what impresses them is the powerful features that enable Kintsugi to automate risk assessment.

No-code SaaS integration

Kintsugi seamlessly integrates with leading SaaS billing platforms, such as Stripe or Chargebee, in just a few clicks—no coding required. Within minutes, the platform pulls in subscription and transaction data, making it easy for you to monitor sales tax exposure.

Exposure monitoring

Kintsugi tracks every transaction in real time against each state's economic nexus thresholds. So, there's no need to stay updated on tax policies from thousands of jurisdictions. Kintsugi also sends alerts when you're nearing or crossing a threshold so that you won't miss a new tax obligation.

Exemption certificate tracking

Kintsugi collects and stores exemption certificates in a centralized and safe location. It also tracks expiration dates automatically and will notify you when a certificate is about to expire. Renewal alerts ensure that the exemptions at hand are valid and audit-ready.

Streamlined filing and remittance

With Kintsugi, you'll save hours and spend only minutes on filings. Just approve the filings, and Kintsugi will process the sales tax return submissions and remittances for every state where you are registered.

Keeps you audit-ready as you scale

One of the challenges as SaaS grows is maintaining business compliance. This task can be challenging when done manually. However, Kintsugi simplifies this process by consolidating invoices, exemptions, and other documents in one storage, ensuring your tax documents are audit-ready.

Kintsugi automates compliance in three simple steps — (1) monitors your exposure, (2) registers and collects taxes, and (3) files and remits taxes — while keeping all tax documents organized and audit-ready for an easier sales tax risk assessment. See the power of Kintsugi and book a demo today.