Tax obligations can be extremely complex, especially for SaaS companies. The tech M&A frenzy over the past few years has led SaaS companies to rapidly scale and expand, and in many cases, their SALT compliance has fallen behind their high-speed growth.
Looking ahead, tech companies expect that employees working from home will further complicate their tax obligations. According to BDO’s 2023 Technology CFO Outlook Survey, tech CFOs expect state taxation of digital services and tax obligations for out-of-state workers to have the largest impact on their organizations’ total tax liabilities in the next two years.
It is critical that SaaS companies not only ensure they are addressing compliance gaps from prior acquisitions and expansions but are also ready to address tax implications of future or planned growth. As states continue to hire personnel to focus on tax enforcement, it is imperative that companies act now to analyze their tax liabilities and go-forward compliance.
Compliance starts by reviewing a company’s activities in every state and determining if there is a filing obligation based on each state’s nexus standards. A company should understand crucial information:
Review the economic nexus standards for each state with BDO’s state-by-state map of nexus thresholds.
Once a company establishes its nexus profile, the next step is to determine the state sales tax treatment of its products and services:
Invoices should be as detailed as possible to determine taxability more accurately. They should include detailed line items for each product sold or service rendered. Remember that support, maintenance, and training are taxed differently, so they will need to be broken out separately. Companies should consider using shipping information, which might not correspond to the invoice bill-to address, to reflect where the software is being accessed or used.
After a company determines in which states it has nexus and which products and services are taxable in those states, it should quantify its outstanding and potential tax exposure so it can establish priorities for remediation. Some companies will also need to record that exposure for financial reporting purposes. Key considerations for determining exposure include:
Once exposure estimates are complete, a company should determine a course of action for mitigation and disclosure. Remittance strategies will vary by state, but reducing tax exposure should include the following considerations:
Determining tax exposure and mitigating liabilities can be a time- and cost-intensive process. Companies should put in place the proper procedures to maintain timely compliance despite changes in state tax laws:
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