Sales Tax Compliance Outsourcing for Startups 101

What is Sales Tax Compliance?

Sales tax compliance involves collecting, filing, and remitting the right amount of sales tax at the right time. For startups, this can mean navigating a maze of different rules, rates, and requirements across different states (and even local jurisdictions). 

Why is It Important for Startups to Get It Right Early On?

Aside from obviously staying on the right side of the law, there are two main reasons proper compliance is an absolute must from the start: 

1. Get set up early. The earlier you start practicing compliance and familiarizing yourself with requirements in each state, the easier it will be as you grow.
2. Build trust. Practicing compliance creates trust with customers and helps you keep a good reputation with tax authorities. 

Why Is Outsourcing Sales Tax Compliance a Good Idea? 

There’s a reason you’re a startup founder or working at a startup, probably because you have a skill or a talent you’re good at—and there’s a good chance that skill or talent doesn’t have anything to do with tax compliance. 

Outsourcing tax compliance from the get-go can be a strategic move, especially because the startup world moves fast and time and expertise are at a premium. Relieving yourself from tax compliance means you and your team can focus on what you’re good at. 

Also, it’s worth noting that sales tax penalties can create a ripple effect—potential investors or future partners may see these as red flags, especially if you’re facing audits or legal battles due to non-compliance.

There are other pros to outsourcing sales tax compliance to a tool too: 

• Leave it in the hands of tax pros. Outsourcing sales tax compliance to professionals or specialized tools reduces your risk of error and frees up your team to concentrate on what they’re good at. 
• Avoid potential issues and penalties that could affect investments and sales. Staying compliant minimizes errors that can lead to hefty fines audits, or even legal issues. 
• It’s easier to start from the very beginning. Implementing a compliance process from the get-go builds strong foundations for your startup, which makes it far simpler to scale as your business grows.  
• It saves time and energy versus doing it all manually. Doing it all automatically means you avoid tedious, time-consuming manual processes so your team can spend time on tasks that actually move the needle. 
• You’re prepared for a tax audit (which is becoming increasingly common for online businesses that sell across state lines). When you outsource compliance, you have detailed, accurate records that stand up to scrutiny in case of an audit. 

What Goes Into Being Compliant?

Staying compliant with sales tax isn’t a one-time task (unfortunately). Instead, there are a series of moving parts you need to stay on top of and regularly monitor. 

Nexus Tracking 

Nexus is the legal term that determines whether your business has enough of a “presence” in a state to warrant sales tax collection. 

Basically, if your startup has an office, warehouse, or even a remote employee in a state, you might have nexus there. 

Sometimes you don’t even need a physical presence to trigger nexus. Many states have economic nexus thresholds based on sales volumes or how many transactions take place each month. 

Let’s look at two examples of physical nexus:

1. California: California considers a business to have nexus if it has an employee or contractor working within the state, even if it’s just one remote worker. So, if your startup hires a content writer who lives in California, you may have to start collecting and remitting California sales tax.
2. Texas: Texas is similarly strict about physical presence, but it also has an economic threshold that’s a bit lower than some other states. If you have a remote employee in Texas or surpass $500,000 in annual sales to customers in the state, nexus is created, and compliance obligations kick in.

Note: the rise of remote work means startups often hire talent across multiple states, which can inadvertently create nexus earlier than anticipated. 

Calculating the Correct Rates 

The reason sales tax is so confusing is because there’s no one-size-fits-all number.

In fact, it varies not just by state but by city and even district in some cases. Rates can also vary depending on the type of product or service you’re selling. For example, software may be taxed differently than physical products, or even be exempt from sales tax altogether in certain states. 

Registering in the Right States

Once you’ve pinpointed where you have nexus, you need to register for a sales tax permit in each of those states. This can be time-consuming as each state has its own registration process. When you’ve registered, you can start legally collecting sales tax and filing returns. 

Filing Your Sales Tax 

Filing a sales tax return is a must-do in every state and jurisdiction you have nexus. The filing frequency depends on the state—some ask for monthly filings, while others are okay with quarterly or annual filings. 

To stay compliant, you have to file your sales tax returns on time. There’s a reason we recommend outsourcing. Remembering every single deadline can be a massive headache, whereas a dedicated sales tax tool will automatically file your return as and when it’s needed. 

Paying On Time 

After filing comes the payment. Some states actually offer incentives (like small discounts) if you pay on time, but all states impose penalties and interest charges for late payments. These charges can rack up quickly, especially if you have nexus in multiple states. 

When Is the Right Time to Outsource? 

Let’s be real here, sales tax compliance probably isn’t your top priority in the early days, but it’s a smart move to get it sorted early. 

The best moment to outsource is from the start. The second best moment is as soon as you start crossing multiple sales thresholds or expanding into multiple states. 

If you’re seeing rapid growth or your team is stretched thin, compliance can quickly become a time-suck that takes away energy from your core business activities. For instance, hitting a threshold of $100,000 in sales in states with economic nexus laws often triggers sales tax obligations that can snowball as you scale. 

Likewise, if you start hiring remote workers across state lines or open new locations, you’ll need to start tracking and managing those additional compliance requirements. 

How to Choose the Right Sales Tax Compliance Outsourcing Tool

A sales tax compliance tool completely takes over the collecting and remitting process so you don’t have to worry about missing a deadline or filing the wrong amount in your return. 

But as a startup, you need to choose a tool that meets your needs and can grow with you. Here are some things to look out for. 

Integrations Are Very Important 

Integrations are what make your compliance tool work in tandem with the platforms you’re already using in your business, like sales, inventory, accounting, and CRM tools. 

For example, a SaaS startup likely needs a Stripe integration, whereas an ecommerce startup might need integrations with Shopify or WooCommerce. 

Choose a tool that integrates with your existing tech stack so you don’t have to manually sync up your platforms or miss out on legal sales tax requirements. 

Customer Support and Compliance Guarantees

Sales tax is notoriously tricky, so having reliable customer support on hand can be invaluable—especially if a filing deadline is looming or you’re working through an audit. 

Look for tools that not only offer customer support, but that also stand behind their service with compliance guarantees. For example, at Numeral, we guarantee your sales tax is filed on time, or we’ll pay for your penalties and interest charges.

Knowing your compliance partner has your back (even financially if something goes wrong) offers an extra level of reassurance. 

Decide Whether You Need a Single Tool or Multiple Tools 

Depending on the tool, you might need a single solution to handle tax calculations and filing, or a combination of tools to cover your specific needs. 

Some sales tax tools offer end-to-end solutions with a built-in tax engine and compliance services, while others might specialize in just one aspect, like filing. 

There are two common types of sales tax compliance tools: 

1. A tax engine calculates and collects the correct amount of tax on each transaction
2. A compliance tool files the right amount of tax in the right state or jurisdiction

But some tools do both, like Numeral. 

Decide what makes the most sense based on your transaction volume, business model, and which parts of the tax process you need the most help with. 

The Cost Considerations of Outsourcing Sales Tax Compliance 

The idea of adding another expense can feel daunting—every penny counts when you’re trying to scale. But investing in sales tax compliance early on can actually save you money in the long run. 

Consider the potential penalties and fines that can pile up with even one small compliance misstep. Sales tax violations can lead to hefty fees that hit when you least expect it—and they aren’t always minor charges. In fact, they can seriously disrupt cash flow and drain your growth budget. 

Using a compliance tool might set you back a couple of hundred dollars per month, but it gives you peace of mind. It’s a strategic investment that prevents any nasty surprises. 

There are hidden cost benefits too. 

Most sales tax compliance tools come with automated features that free up your team’s time and resources. This actually translates to cost savings over time.

3 Sales Tax Compliance Tools to Consider 

Here’s a quick rundown of some top tools in the sales tax compliance space. 

1. Numeral 

Obviously, we’re biased here, but we’ve designed a tool that automates all parts of the sales tax compliance process—from nexus tracking to filing. You can also easily integrate with popular platforms like Stripe and Shopify, so it’s very flexible regardless of the category your startup falls under. 

Numeral offers a bold compliance guarantee to cover any penalties or interest fees if a filing is missed or late. 

2. Avalara

Avalara offers a ton of integrations and handles both sales tax collection and filing. It’s particularly popular with businesses that need a highly complex and customizable solution with support across multiple tax types, including VAT and excise tax. 

3. TaxJar

TaxJar is particularly common among ecommerce businesses because of its strong integrations with Shopify, Amazon, and WooCommerce. It also offers automatic filing options so you can rest easy knowing you’re staying compliant. 

Final Thoughts

Sales tax compliance might feel like a giant hurdle, but it’s one worth clearing early on. 

With the right approach, it doesn’t have to be overwhelming—especially if you choose to outsource. By handing over compliance to a specialized tool, you can free up valuable time, reduce the risk of costly errors, and position yourself for sustainable growth without any pesky penalties and setbacks. 

As you continue building your startup, remember that sales tax compliance is more than a regulatory box to tick. From tracking nexus to filing and paying on time, a solid compliance strategy (with a dedicated tool) will keep you on the right side of the law.