Why Managing Compliance Can Be Tricky for Growing Companies

by Lee Breslouer July 27, 2022

There’s no denying the benefits of growing your company, including the opportunity to hire more employees and providing more value to your customers. But as your company’s bottom line increases, so does the potential for sales tax liability. A company’s growth complicates your ability to manage compliance, but it doesn’t have to be a losing battle. 

We spoke with two experts at Hands Off Sales Tax (HOST) – President/Co-Founder Mike Espenshade and VP of Operations Kyle Morgan – to learn about the compliance challenges companies face as they grow – and how to tackle them.

Tracking sales tax liability in multiple states

Fast-growing companies often find themselves with “good” problems, including the need to address additional sales tax liability as a result of exponentially increasing sales. (For more detailed information about this liability – otherwise known as nexus – read this helpful guide.) 

“It’s important for companies to know if they’re accruing liability,” Morgan says. “That’s our starting point for correspondences with our customers to make sure that they have their arms and minds around their nexus footprint, whether it’s physical or economic. That’s the groundwork of the whole picture.” Physical nexus is fairly simple to track: it’s usually where your company has offices, employees, a warehouse, affiliates, or inventory. Conversely, economic nexus isn’t as easy to figure out – especially without any help from technology.

States use varying sales and transaction thresholds to determine which companies must collect and remit sales tax to their revenue department, which can make things extremely complicated for a business trying to increase sales while supporting their customers. For example, while California requires sellers generating at least $500,000 a year in gross revenue on the previous or current calendar year’s sales to collect sales tax, in Vermont, the threshold is only $100,000 or at least 200 individual sales transactions during a preceding 12-month period.

If your sales are increasing quickly across the US and you’re not tracking the exact dollar amounts and number of transactions on a per-state basis, your small business may already have sales tax liability and not even know it. “We defer to TaxJar’s Nexus Insights tool for companies wanting to keep track of it,” Morgan explains. “Without that, it’d be very challenging. We can conduct manual studies, but to do those as often as you need to – especially if you’re growing rapidly across the country – it would be costly to potentially conduct a manual study each month.” 

Audit risks

Unfortunately, there are a number of reasons companies can get roped into an audit by a state, for reasons as varied as going to a trade show out-of-state to sending out a press release that gets noticed by an auditor – common occurrences that lead to an audit – and are covered in depth in a recent article

“We tell our clients and prospects that we don’t have a crystal ball, but the more states you’re in and the bigger you are, the more likely you’ll experience multiple sales tax audits in your lifetime,” Espenshade explains. “The other part of our company [TaxMatrix] deals with mid- to large-cap companies, and the likelihood and instances of multiple state audits for those companies is much larger.”  

States may also target companies for audit that have been selling to customers in their locality without collecting and remitting sales tax. It’s common for growing businesses to approach consultants like HOST with the aim of managing sales tax compliance for the first time in the company’s life. “We conduct nexus studies on a weekly basis, and almost every time, the deliverables outline massive liabilities,” Morgan notes. “It’s a growing problem, and it doesn’t just go away if you avoid it.”

Audits can be time-consuming and costly, so doing your best to minimize the risk of recurring audits is a financial benefit in the long-term. “It’s almost easy to avoid sales tax compliance because it appears to go away for the moment – but we can speak from experience that it doesn’t,” Morgan says. “And if you’re growing quickly, you want to make sure you’re compliant every step of the way.” 

Even if your growing company has a high risk of being audited and hasn’t been managing sales tax compliance, there’s still a path forward to compliance. Consultants like HOST often recommend that companies with significant sales tax liabilities consider filing Voluntary Disclosure Agreements or backdating registrations with historical effective dates, the pros and cons of which are laid out in this article. As always, it helps to consult with experts who have state and local tax experience to help determine the next move for your company. 

Product taxability

Here’s a (not so fun) fact about sales tax: what’s not taxable today may be taxable tomorrow. “This is a trend we can’t predict, but I feel strongly that over time states will continue to try to expand the tax base of what’s taxable versus what currently is not, or what currently is in a gray area,” Espenshade explains. “Especially if a couple dozen states have already successfully gone down that path, why wouldn’t another state choose to go down that path too? It’s not going to hurt their ability to attract jobs and companies if it’s just adding another [tax] category a company now has to collect and remit.”

One example of this is that a growing number of states are ruling that SaaS companies need to collect sales tax on their services. But each state has its own definition of what constitutes a SaaS business, and that can complicate things. “Digital goods, SaaS and information services are on the front edge of the developments of law,” Morgan says, adding that consultants like HOST can stay on top of those developments for companies that sell those types of services.  

In fact, HOST helps many current TaxJar clients through the process of determining how their services are classified for the purposes of sales tax. “While we can do custom sales tax research projects, the majority of the work we do for TaxJar clients is mapping,” Morgan explains. “We determine how their products fit into the taxability of what TaxJar has designated as that product tax code.” This is an essential step to help your company manage compliance issues, as if you don’t properly classify your products or services, you don’t have much of a chance of collecting the correct sales tax rate from your customers. 

The basics of US sales tax

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