Sales tax is the liability that most often surprises SaaS founders in diligence. It does not show up on the P&L until someone looks for it, it accrues in every state where you have nexus and sell a taxable product, and because you did not collect it from customers, the company pays it out of its own cash.
Nexus after Wayfair
In South Dakota v. Wayfair (2018) the Supreme Court allowed states to require out-of-state sellers to collect sales tax based on economic activity alone. Every state with a sales tax now has an economic nexus rule. Many use $100,000 of sales into the state during the current or prior calendar year; larger states such as California and Texas use $500,000. Some states also count transactions, though several have dropped transaction tests.
Physical nexus still exists too: employees working remotely in a state, an office or inventory can create nexus regardless of sales volume.
Taxability is the second question
Nexus only matters if what you sell is taxable in that state. States classify SaaS differently:
| Treatment | Example |
|---|---|
| Taxable as software or a digital service | New York treats remote access to prewritten software as taxable; Washington taxes digital automated services |
| Partially taxable | Texas taxes data processing services on 80% of the charge |
| Generally not taxable | California generally does not tax SaaS delivered without tangible property |
Rules change and depend on what exactly you sell, so confirm each state's current position before deciding.
Building the exposure picture
- Pull revenue by customer ship-to or bill-to state for the last four years.
- Find the date you crossed each state's threshold.
- Determine taxability of your product in each of those states.
- Estimate uncollected tax, interest and penalties.
- Identify customers who may be exempt (resale certificates, government, nonprofits where applicable).
Fixing it
- Register and collect going forward in every state where you have nexus and a taxable product.
- Voluntary disclosure agreements (VDAs) for past exposure usually limit the look-back period and waive most penalties.
- Customer collection of back tax is sometimes possible for larger accounts, but it is a commercial decision.
- Automate calculation in the billing system once registrations are in place.
Why it matters for the raise
Diligence teams calculate this exposure and either reduce the price, escrow part of the proceeds or require a cleanup before closing. A nexus study and a remediation plan in the data room remove the issue from the negotiation.
What we do
We run the nexus study from your billing data, determine taxability by state, file VDAs where they help, register you where needed, and file the returns every period as part of Tax Prep.
Exemptions and certificates
Some customers are exempt from sales tax, for example certain nonprofits, government entities or customers buying for resale where that applies. Collect and store exemption certificates before invoicing without tax, and renew them when they expire. Missing certificates are a common reason exposure estimates stay high.
Sources
- South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018), opinion text (Cornell LII)
- Texas Comptroller of Public Accounts, sales and use tax
- California Department of Tax and Fee Administration
- New York State Department of Taxation and Finance, sales tax
- Washington Department of Revenue
Questions founders ask
We have no office in a state. Can we still owe its sales tax?
Yes. Since South Dakota v. Wayfair (2018), states can require remote sellers to collect sales tax once their sales into the state cross an economic nexus threshold, even with no physical presence.
Is SaaS taxable everywhere?
No. Taxability depends on how each state classifies SaaS. Some tax it fully, some partially and some not at all, so each state where you have nexus needs its own answer.
