Prepare Thyself For When The Tax Man Cometh
Ben and Starr have an informal fireside chat about recent tax changes and how to navigate them when running a SaaS company with nationwide sales. Learn about some of the surprising rules some states have around business classifications and why you might have to pay sales tax in one state but not another. Uncle Sam is crashing the internet party, listen and make sure you're prepared!
Starr: Josh is not with us this week and I'm, I'm not actually sure, do we know what Josh is doing or is he just out?
Ben: He's just out gallivanting, I suppose.
Starr: That's all right. We, we respect people's privacy here at Honeybadger Industries LLC and yeah. So Ben and I are just going to do a little fireside chat episode. That's when there's only two of us around. We're only... we just sort of chat about whatever is going on and on our mind. And this week that is sales tax.
Ben: Super fun topic.
Starr: Yes. So is it okay if I set the stage a little bit?
Starr: Okay. So being an internet company and specifically being a software as a service company, Honeybadger Industries doesn't usually have to worry that much about sales tax. We are located in Washington state, which is actually one of the only places that sort of historically has had a sales tax on software as a service or services in general, I guess. And so it's really not been that big of a deal, but some things have changed, sort of... it, I don't know, I just feel like the party is, is coming to an end on the internet. We had all these great times and then now the government's coming in, the party's over and everything's owned by Google and now we're just having to sort of keep up a little bit. So. So what's been going on with the sales tax, Ben?
Ben: So you mentioned that we're in Washington and that they do charge sales tax. So we do pay a sales tax and our accountant handles that for us, figuring out what that number is. We don't actually charge sales tax to our customers though. We just decided early on that we would just eat that cost. And so we, we charge the same amount to all our customers everywhere.
Ben: But recently, the changes you've alluded to include a Supreme Court decision. So this is in 2018. Wayfair and South Dakota, and the state of South Dakota sued Wayfair because Wayfair wasn't paying sales taxes in South Dakota. And the Supreme Court overturned previous rulings, which said that basically if you were, if you didn't have nexus in a state, you didn't have to pay a sales tax in that state. So nexus being some sort of location, like a headquarters or an employee in that state. So, Wayfair is arguing, "Well, we don't have nexus in South Dakota, we don't have our offices there so we don't have to pay sales tax there." But, the Supreme Court decided that South Dakota had a point and that Wayfair should actually pay sales tax in South Dakota. And so that kind of changed everything for everyone who sells across state lines in the United States. That was kind of a big deal.
Starr: Yeah, I felt, I remember feeling sort of, it kind of felt like a sinking feeling in the pit of my stomach. I felt some, some tingles happening. Yeah. Just because it's just so... You know, we're a tiny company, we're five people and we... possibly soon to be six. But you didn't hear that here... possibly. And yeah, and we're developers and we don't really have people on staff whose job it is to worry about sales tax and stuff like that. So, so yeah. So for me, hearing that, okay, suddenly internet people are going to have to pay sales tax sort of injected this bit of uncertainty into my life where it's like, "I don't really know what we're supposed to do." And so I actually... I emailed our accountant, which is what you do when you get anxious about sales stuff or tech stuff.
Starr: I do this all the time, mostly with my personal accountant, but sometimes with the Honeybadger accountant and... so I was like, "Okay. What, what this? Please? I'm anxious. Please soothe me." This is the new law, right? Everyone's got pay sales tax, so it's law. So it has to be really... there's just an obvious way to do it. And she was like, "Oh... actually right now nobody really knows how to do that. All the regulations are kind of up in the air. Every state is doing it differently..." And all that. And this was a year, maybe ago, I don't know... six months to a year ago. And so I was just wondering, do you know if that's still the case?
Ben: Yeah. So yeah, like I said, this happened in the summer of 2018 and we basically ignored it for a while, like most small companies did, I'm sure.
Ben: And yeah, we started looking into it and there is some, some vagaries, some, some confusion. And when the new year rolled around... 2020 started, we started look at this again because our accountants like, "Oh, you should probably pay attention to this."
Ben: And so I did a little bit of digging. And to answer your question... yeah, there's still a lot of ambiguity about going... what's going on. But it has settled down a little bit and there are some, there's some rough guidelines you can use now to know whether you should really worry about this and have to give props to Avalara. They are a company that sells a software that helps to manage sales tax reporting and remittance. And they, I chatted with them to find out, "Hey, what do we need to do and do we need to be concerned about this?" And their people were very helpful in getting started. You know, they have all those software as a service companies out there that don't have pricing on their site and you're like, "Oh, that's so terrible." Right? You know, because it just... "Give me the price, man." And Avalara is one of those where they don't have pricing on those sites. Like, "Contact us." It's like, Ugh. All right, fine. You know?
Starr: Oh yeah, of course. Because what's your other option? Like, hire your own staff of lawyers or-
Ben: I don't know, yeah.
Starr: I didn't actually know it was a product. I assumed it was just a consulting company since you sort of got this information from them. So I assumed that they were consulting for it.
Ben: Well, I don't know. Maybe they do some consulting as well, but they definitely have some software in the mix. So maybe it's a hybrid. But, they were helpful. They were actually helpful and talking to them even though they don't have pricing on their side. So it was great to do that. And we walked through our numbers. So what I did was... what we do every year is we put together a report for our accountant on the sales that we've done through Stripe. And so we find out which states we've actually sold things in and we'd done this every year because, well Washington, as you said, charges sales tax. And so we had to figure out every sale that we make in the state of Washington and we then determine what zip codes those sales were in. And we can report that to our state authority to get their taxes paid.
Ben: So I just increased the scope of that a little bit. I took our same Stripe export for the entire year and I did a pivot table based on the transactions and I grouped it by state and I summed up the amounts and I summed up the number of transactions just to see how much we do per state. And I walked through that list with the Avalara guy on the phone and basically found out that we're doing okay. We do have some significant states, like New York and California. We have a lot of transactions in those states. But, we're not at a point where we are, we have reached the threshold for any of those States where we actually have to pay sales taxes based on the current laws. So, the way that it works is each state has their own rules and typically, there's some sort of threshold, the minimum threshold that you have to meet in order to have an obligation to pay sales tax in that state.
Ben: So, let's say the state of Alabama. It might have a threshold of $100,000. If you've done $100,000 of sales in their state for the year, then you're on the hook. Or it might be a number of transactions. Let's say state of Alabama, maybe it's 200 transactions. If you sold 200 items in their state for the year, then you're on the hook. Got to pay them some sales tax. So fortunately, running the numbers for us, I determined that we don't meet any of those thresholds for any of those states. So, that was really nice.
Starr: Yay. Oh wait... Oh...
Starr: I saw that. I saw that horn around.
Starr: I mean, I think the real lesson here is that pivot tables have come to the rescue again.
Ben: Amen. I love pivot tables.
Starr: I know. Pivot tables are amazing.
Ben: That was a total level up of my life when I learned how to do pivot tables.
Starr: Yeah, I mean I... okay, so I know you really like pivot tables, so I just wanted to give you a chance to talk about it.
Ben: Thanks, man.
Starr: How much you liked them.
Ben: Got my back.
Starr: Yeah, I got your back. So yeah, so we don't meet any of these thresholds. How... I, I see that there's this, that we have a link to a blog posting our notes for the show. Should we?
Ben: Yeah, we're definitely going to put that in the show notes. So that's, that's a link to Avalara and they actually have a page that kind of gives you the brief rundown on what this is all about and they show you what those thresholds are per state. So, both the dollar amounts and the transactions. And one thing that the guy I was chatting with on the phone pointed out, he was like, "In the case of SaaS, there are two things you really need to be interested in. One is it's not just customers, it's actually number of transactions, right? So if you're billing monthly, like most of us are, then you have 12 transactions per customer per year." Right?
Ben: So that can, that can get, you can get up to that 200 transactions number pretty easily that way.
Starr: I just want to say that doesn't seem very fair.
Ben: Well, we get that. I guess the other side of that is a number of States don't charge sales tax for software delivered as a service. So.
Starr: Oh, okay.
Ben: Even though they might have dollar minimums and transaction minimums, we still get off the hook we're a SaaS, so that's nice-
Starr: Oh, that's good. Yeah.
Ben: Not every state, but in many states they will not charge. They will not require you to pay sales tax on SaaS. Yeah.
Starr: Can I just say that I'm still a little bit miffed that in the new tax laws that they passed, the new federal tax laws that they passed a couple of years ago, that they got rid of all these, all of these exemptions or loop, not loopholes, but sort of... I don't know, what's it called when the government's like, "We like farmers"? So you're a farmer, so you get this tax, I don't know.
Starr: Deduction, exemption, whatever.
Ben: Yeah, deductions.
Starr: So, yeah. So we technically classified as a... we're technically classified as a manufacturer. And I learned about this from Ian Landsman on his podcast because he mentioned it. And so I send that to our accountant and I was like, "Are we a manufacturer?" And she's like, "Yes." So, for many years we were classified as a manufacturer and we got a tax break for it and we lost that. And I don't really care about the money. I just wished that we were technically still a manufacturer. But then we might get charged sales tax.
Ben: That's true. Or, if we were a services firm, if we had any services on top of our SaaS, some states split that out. And so they will charge you sales tax or require you to charge sales tax for services rendered but not SaaS. So yeah, there's-
Starr: Oh, really?
Ben: There's some out there that are kind of a hybrid, but we're not like that. We don't, we don't do services here at Honeybadger.
Starr: Okay. We shouldn't tell them what the last word in the acronym SaaS means. Because that would be bad.
Ben: So, it was an interesting little discovery. It's been a fun kind of... it's again, it was one of those things where we just ignored and hoped it would go away and it's not going away. But, for many of us that don't have obscene levels of transactions... I mean, Honeybadger is a pretty good business. We're making good money and even still we're below thresholds in many cases because, well, we don't have a lot of customers in any given state, right? They're spread out all over the place.
Starr: Yeah, we've kind of work the spread.
Starr: Well, I'm glad to hear that we're not a... yeah, that we don't have to hire a new developer just to figure out all the ramifications for sales tax and we can keep passing along the savings are beautiful customers.
Starr: Well, should we wrap this up? Is there anything else we want to cover?
Ben: No, I think that's it.
Starr: All right. Well, it's been great talking with you about sales tax. I have been so excited about this all week. To get talk about sales tax. One of my favorite topics and... yeah. You know, actually that's... oh wait, no. I was going to make a joke about how Josh lives in Portland and they don't have sales tax there, so that's why he's not here. But then I realized he doesn't actually live in Portland, so-
Ben: He just does all the shopping in Portland because he lives in Vancouver.
Starr: Yeah, he lives in the Washington side of the border. So, I don't know.
Ben: Funny story, though. That reminds me... as I was reading up on some of this stuff, the state of New Hampshire does not charge sales tax.
Starr: Live free or die, that's them, right?
Ben: And yeah, so they get very agitated when the states nearby them get all upset when their residents... like the state of Massachusetts for example... it gets kind of upset and cranky with New Hampshire because all their residents cross over the border and go buy stuff in New Hampshire and avoid the whole sales tax thing. And at one point New Hampshire even detained some sales tax collectors from Massachusetts who were in New Hampshire trying to scope out Massachusetts residents who were avoiding buying stuff at the store, right?
Starr: That's so funny. That's so funny. So in this scenario, the internet is sort of the 51st state.
Ben: Yeah, I guess so.
Starr: It's like all the other states are getting upset that the internet's getting all this money and not paying their taxes to those states. And so I think it's safe to say it's safe to say that the state of the internet is, it's just all on fire.
Ben: Yeah. Well, you know what they say... this is fine.
Starr: If everything's fine... that's a great note to end the show on, then.
Starr: If you would like to write for us at Honeybadger, we hire writers for our blog. If you're interested in writing about Ruby and Elixir stuff, we have lots of writers for all the other topics. So, we're looking for specifically Ruby and Elixir right now. And if you want to give us a good review on any of your fine podcasts. Whatever you get a podcast from. I don't know, I'm 80 years old. Just please do that, because we would love to see it. And until then, I'll see you later, Ben. And this has been FounderQuest.