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The Importance of Tax Compliance for Startups

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Tal Bar David

Sales tax. It’s not the most exciting topic, but as a startup, it’s one you’d best get comfortable with right from the get-go. 

The launch of a new business brings with it the promise of adventure in the shape of new products, exciting opportunities, and sales journeys that need to be nurtured. 

So why would you want to get pulled into the complex and droll world of startup tax compliance in these triumphant times? 

Because it could shape the future of your startup’s success. 

What you need to know about startup sales tax

Sales tax, simply put, is the tax applied to the sale of goods and services. And in the United States, each state has its own sales tax laws and rates, which can make things rather confusing for businesses operating across state lines, or just starting out. 

In the borderless landscape of eCommerce and SaaS products, companies can trigger a sales tax nexus (the creation of a tax obligation) in a matter of clicks without you even being aware of it. So while you may not have a physical presence in a specific state, sales tax compliance may become a concern once you sell to customers within another state’s border. 

If you do have a nexus and neglect to collect and remit sales tax to the applicable state body, you end up exposed to years of overdue sales tax. 

But isn’t this the same risk every company runs? It is, but the impact of non-compliance on a startup is far worse. 

Why startup tax compliance matters

Taxes for startups are no different from any other business. But the benefits are greater. That’s why compliance for startups shouldn’t be an afterthought. It’s part of the very foundation the future of your business is built on. 

But as we mentioned in the previous section, failing to comply with sales tax laws can have serious consequences for startups. So let’s dive deeper into why sales tax compliance matters so much, before we get to how you can make compliance easy:

The collective costs of failing to collect sales tax

Non-compliance can lead to legal trouble and financial penalties. Failing to collect and remit sales tax exposes your business to fines, interest charges, and state-specific penalties. These costs can quickly add up and put a strain on the business’s finances. 

Give investors the assurance they need

Investors play a vital part in startups gaining momentum. As startups raise funds, each round is subject to its own comprehensive due diligence. And one of the main areas that investors focus on come decision time is tax compliance, and more specifically, sales tax compliance. When startups can’t provide assurance through due diligence, it becomes difficult to get investors to back your business. 

Lost loyalty is hard to win back

Being exposed to non-compliance and overdue sales taxes will leave you with two options: pay in the outstanding balance yourself and adjust your prices going forward, or collecting the outstanding amounts from your customers. You’d agree that the last option isn’t really viable. But even if you don’t go back to collect sales taxes from them, the increased price of your services or products will affect your customer loyalty. 

Balancing the opportunities and risks of a borderless landscape

With the rise of online business opportunities, startup tax compliance is becoming more important than ever. As we mentioned earlier, each state has its own sales tax laws and rates, which can make things complicated for businesses that operate across state lines. For SaaS startups, especially, sales tax is even more complicated as states classify these offerings under different tax laws when they lack dedicated SaaS tax legislation. 

The journey to compliance begins with understanding your startup’s tax liabilities and obligations. And the place to start is by dispelling a few of the misconceptions that exist around sales tax. 

Common misconceptions about sales tax

Misconceptions about sales tax can be dangerous for startups as they may unwittingly leave a business exposed. So let’s dispel the most common sales tax misconceptions that could harm your startup’s growth. 

Misconception #1: Sales tax only applies to physical goods, not services

This is a common misconception, but it’s not true. Many states require businesses to collect and remit sales tax on services as well as physical goods. So it’s important for startups to remain aware of the sales tax laws applicable to their offering in each state they do business.  

Misconception #2: Sales tax rates are the same across all states

This is also untrue. Each state sets its own sales tax rates, and these rates can vary widely. In addition, some states have additional local sales taxes that businesses must collect and remit. It’s important for startups to understand the sales tax laws and rates in each state where they do business.

Misconception #3: Sales tax compliance is not important for small businesses

Sales tax compliance is just as important for small businesses as it is for large businesses. In fact, startups may be more vulnerable to legal trouble and financial penalties if they fail to comply with sales tax laws. It’s important to remember that when you comply with sales tax laws from day one, you protect your business from exposure in the future so that your revenue can go to growing your business, not fixing your negligence. 

In short, there are several common misconceptions about sales tax that can be dangerous for startups. It’s important to understand the sales tax laws and rates in each state where you do business and to consult with a tax professional if you have any questions or concerns.

Tips to get startup sales tax right from the start

You now know why startup tax compliance is so important for startups. And you’re aware of the misconceptions that can lead to exposure down the line. So the remaining question is how do you ensure compliance from the start of your startup’s journey? 

Tip #1: Keep detailed records 

Compliance starts with keeping track of each transaction, including the amount of sales tax collected and remitted. This way you’ll stay organized and you’ll be able to file tax returns in time. 

Tip #2: Understand state-specific startup tax compliance

Make sure you understand the sales tax laws and rates in each state where you do business. This includes understanding whether you need to collect sales tax on services as well as physical goods, and whether there are any additional local sales taxes that you need to collect and remit.

Tip #3: Use sales tax automation software

No matter how drastically the volume of your transactions increases, sales tax automation software helps you monitor your sales tax obligations and, as needed, calculate, collect, and remit the right amount of sales tax in each state without any manual labor. It also helps you keep a record of each transaction as it happens. 

Tip #4: Find a tax partner that gives you back your time

Sales tax is a complex and time-consuming journey. By partnering with a tax partner, you’ll be able to ensure compliance without investing your time and energy into getting it right. With the right partner, you can invest that time into growing your business. 

Complyt: A tax partner that understands the importance of the strong beginnings

No ERP? No problem. Complyt has helped countless startups on their sales tax compliance journeys, creating tailored automation platforms that connect directly with their CRMs where larger ERP landscapes aren’t available. 

So when it comes to startup tax compliance, you shouldn’t feel that the size of your business disqualifies you for professional support. 

Are you ready to partner with a company that understands the importance of first steps? Then get in touch with Complyt today

Find out how we can help your company
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