Sales tax challenges of software and tech companies

The 2018 Supreme Court Wayfair decision gave us a bright line standard for determining sales tax nexus: Generate a set amount of revenue in a state in a set amount of time and your company has to collect and remit the applicable sales tax. Seems clear. However, companies still must deal with the ambiguous physical presence standards as well as the varying taxability rules from state to state.

Our third annual survey of financial professionals with the responsibility of managing sales tax revealed that financial leaders continue to lean on internal resources while wrestling with the current economy, inflation and a tight job market. Software and tech respondents to our survey reported challenges such as audits, timely filing of sales tax returns and charging the correct sales tax.

Who handles compliance?

More than a third of software and tech companies that responded to our survey already file sales tax returns in 11-30 states; a quarter of software companies and more than half of tech companies sell into more than 30 states. Most companies in both categories also plan to expand into more states in the coming year.

(About a third [30%] of software companies in our survey had annual U.S. revenues of at least $10 million and more than a third [35%] of tech companies had annual U.S. revenue of at least $26 million. In both categories, slightly less than half of the respondents sell their products and services direct but not online.)

Almost all companies in both categories use internal staff and resources or integrated third-party sales tax software to handle sales tax obligations. Some 75% to 80% of companies in both categories use internal staff and resources to manage jurisdictional notices and communication. More than three out of every five software companies (61%) use internal resources when calculating sales tax, but nine out of 10 technology companies surveyed use internal resources or integrated third-party sales tax software when calculating the tax.

Managing sales tax is burdensome. When asked the primary reason they weren’t fully satisfied with their company’s current approach to managing sales tax, half the software companies said the job takes too much staff time and a third of the companies said they lack adequate understanding of the complexities of sales tax.

Among tech companies, 40% said they didn’t have the processes in place to handle sales tax obligations and the same percentage said it takes too much staff time. Lack of internal knowledge or expertise and not enough time/bandwidth are the biggest barriers to more easily managing sales tax – especially so in tech companies, where 60% of respondents cited the latter reason.

So why not outsource the process? Regarding the advantages of outsourcing sales tax compliance, 35% of software companies cited their desire to reduce risk and 30% wanted to gain access to the expertise of the outsourcer. Among tech companies, 35% are driven to outsource sales tax compliance due to a lack of internal resources while a quarter want to cut costs and 20% want to access expertise.

The threats

What were respondents’ biggest sales tax worries for 2023? Significant percentages in both categories of companies cited understanding the taxability of their products and charging customers the right sales tax. Tech companies (17%) also worried about sufficient staff resources to handle their obligations.

What’s the worst that could happen?

One in five software companies (22%) reported increased state sales tax audits in the past two years and 39% of these companies expect state sales tax audits to increase more.

Today, a business must stay on top of their sales tax requirements. With limited internal resources and increasing complexity, this task is becoming more difficult to manage internally. For additional perspective and discussion you can watch our 30-minute webinar Tax Talk with TaxConnex – Taxability of Digital Goods or Services or download the eBook below!