Welcome back to this week’s deep dive into The CFO Tech Stack: Sales Tax!
In case you missed last week’s edition on Software to make Payroll a breeze, you can grab that right here.
Today, we’re tackling an essential, yet often complex part of your finance operations - sales tax compliance. We’ve seen countless founders forsake this requirement, resulting in penalties, interest, and back taxes owed - don’t make that same mistake!
Let’s dive into our preferred tools for managing this complex requirement…but first, let’s start with an overview of what exactly sales tax is.
The government wants to get paid.
Whether it’s when you pay an employee, own property, or make a sale—they’ll find a way.
Sales tax is a consumption tax specifically imposed on the sale of physical goods or software and can vary depending on where you are in the US. It might be higher in one city than another because local areas can add their rates to the state's base tax. This all ties back to a term called “nexus,” which is just a fancy way of saying you’ve met the requirements to start collecting and remitting sales tax.
Oh, and the most challenging part of sales tax? Each state has different rules and requirements for how nexus is calculated 🤯.
This means you need to be careful about charging the right amount of sales tax, especially if you sell things in different places.
If you are based outside of the US, you would be dealing with what is known as Value Added Tax, which gets taxed at each stage of the supply chain.
The good news is that sales tax isn't a cost to your business if you collect it correctly from your customers—you just need to make sure you remit those filings correctly.
Given the varied rules and complexities across each state, it’s not common for a business to file sales tax on its own. Instead, they often use a special service to automate it for them.
Let’s now discuss some key features to look at when assessing a sales tax provider.
Finding the right sales tax tool can take a big headache out of managing sales tax, which can get way too complex, and way too fast.
Here’s what you should look for in a tool to make things easier:
Accurate Tax Calculations: Above all else, a good sales tax tool should automatically figure out the right tax rates for you, using the latest rules for each place you sell, or where your employees are based.
Seamless Integration: Look for something that plays nice with the sales platforms you use like Stripe, Shopify, or Amazon, and fits right in with your accounting software, whether that’s QuickBooks Online, Xero, or NetSuite.
Automated Filing and Remittance: The best tools do the heavy lifting for you, filing your taxes and sending the money where it needs to go, all to help you cut down on mistakes and save precious time.
Exemption Certificate Management: You'll want a system that keeps all your exemption certificates in order, easy to access, and updated, ensuring you’re always compliant. For context, an exemption certificate is a certificate showcasing that a customer of yours is exempt from needing to pay your sales tax.
Audit Support: If an audit comes up, your tool should have your back with solid documentation and support to help minimize any potential issues or penalties.
Now that we know what to look for, let’s have a quick word on Merchant of Records vs Non-Merchant of Records
Merchant of Record
When diving into the world of sales tax compliance, you'll often come across the term "Merchant of Record" (MoR), which functions differently from non-merchant of Record setups.
A Merchant of Record takes on the legal responsibility to collect and remit sales tax on behalf of your business. By using an MoR, they become the official seller recognized by the law. This means they handle all tax calculations, collections, filings, and remittances for every transaction. This setup is especially helpful if you sell in multiple jurisdictions or countries, as the MoR ensures compliance with all local tax laws, significantly reducing your legal and financial risks.
If you are not using a Merchant of Record, which is the default for most businesses, your business retains the responsibility of being the official seller. In this scenario, you must manage all aspects of sales tax compliance yourself or with the assistance of a sales tax tool. This includes calculating the correct tax rates, collecting taxes from customers, and reporting and remitting taxes to the appropriate authorities.
While retaining control over the sales process gives you more flexibility, it also increases the complexity of your operations, particularly if you operate across multiple tax jurisdictions.
Now that we’re familiar with what a Merchant of Record is, let’s talk about our favorite picks - for both Merchant of Record solutions and those suited for businesses managing sales tax compliance independently.
Here are our top picks in each category:
Non-Merchant of Record Tools
Avalara may be the most popular sales tax tool out there. It integrates seamlessly with a wide range of e-commerce and accounting platforms, making it a favorite among businesses of all sizes. At the same time, Avalara can also be pricey, so be prepared to get it out of your wallet.
TaxJar is another popular tool, and is more price friendly than Avalara. TaxJar was acquired by Stripe in April 2021, making it easy to integrate with your Stripe account.
Merchant of Record Services
Paddle not only acts as your Merchant of Record but also handles everything from sales tax calculation to collection and remittance on a global scale. It's ideal for software companies looking to sell internationally without the hassle of managing multiple tax regulations.
A great choice for e-commerce businesses, Global-e becomes the Merchant of Record for all international transactions, ensuring compliance across borders and localizing transactions to enhance customer experience.
Regardless of whether you use a Merchant of Record…or whether you file using a sales tax tool or on your own…be sure not to overlook this reporting requirement.
Regardless of whether you use a Merchant of Record…or whether you file using a sales tax tool or on your own…be sure not to overlook this reporting requirement.
If you do, you may find yourself with an unfriendly letter from the IRS or your local tax authority requesting some funds you won’t be too thrilled to part with.
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