By Heather Ake
For companies in rapid growth mode, sales and use tax compliance tends to sit low on the priority list. And then, it suddenly matters.
But as companies scale across states and/or add new revenue streams, tax exposure also can quietly expand in the background. The U.S. has more than 12,000 distinct sales tax jurisdictions, and each has its own rules and rates. So, even a small misstep can snowball into significant penalties or create challenges during due diligence.
At the most basic level, sales tax is what a business collects from customers on taxable goods or services. Use tax applies when a company purchases taxable items and no sales tax was charged (which commonly occurs from an out-of-state vendor).
For example, if a startup based in California orders $10,000 of equipment from an Oregon supplier, the business likely owes use tax to California. The point of the system is to keep local and remote sellers on equal footing.
However, complexity arises because rules differ dramatically by state and industry. For founders, that complexity becomes more than a compliance nuisance — it’s a business risk. Noncompliance can delay funding, lower valuation and, in some cases, create personal liability.
Legally, nexus is the connection that requires a company to collect and remit sales tax in a state. And historically, this required physical presence such as an office, a warehouse, or an employee. But after the Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc., states have imposed obligations based solely on economic nexus, meaning a certain level of sales or transactions within the state.
Most states set the threshold at $100,000 in annual sales. So, even fully remote SaaS or e-commerce companies may trigger nexus without realizing it. And today, more than 45 states enforce economic nexus standards, making it critical for startups to regularly review where their activity might create obligations.
Mapping your tax liability
A quarterly “nexus map” can help track thresholds and avoid surprises.
But it gets tricky because not everything a company sells is taxable.
Tangible goods are almost always taxable. However, digital products like software as a service vary: some states tax them fully, others exempt them, and a few tax only certain components and may do so at varying rates.
Services are often exempt, but are also increasingly being taxed as states broaden their bases to capture digital and professional offerings. Understanding the nuance isn’t just an accounting detail. It’s critical to ensure accurate pricing and revenue forecasting.
Further, marketplace facilitator laws mean that platforms such as Amazon or Apple often collect and remit sales tax on behalf of third-party sellers.
Startups selling directly through their own website or issuing invoices must manage those obligations themselves — even marketplace sales could require a business to register and file in a state. Keeping marketplace and direct sales segmented in your accounting system avoids double taxation or missed remittances.
It’s worth noting that a big area that can trigger an audit is tax due on nontaxed purchases. Another is bundling a nontaxable service with a taxable product/service, which is an area Burkland sees come up frequently with our clients.
Additional detail on overlooked areas, which can create exposure:
- Shipping and handling: Taxable in some states if bundled as part of the sale and exempt if listed separately.
- B2B sales: Typically exempt if the buyer provides a resale or exemption certificate (missing or invalid certificates are a common audit trigger).
Do your diligence before due diligence
Sales and use tax issues don’t just surface in audits. They also appear in diligence.
Buyers and investors frequently uncover unpaid liabilities, and this can lead to escrow holds or valuation adjustments. By contrast, clean compliance records demonstrate operational maturity and readiness to scale. Penalties, back taxes and interest are painful enough, but once a state initiates an audit, it’s often too late to access Voluntary Disclosure Agreements. Proactive compliance is the only safe route.
So, sales and use tax may feel like a back-office issue. But for high-growth companies, it’s much more than that. It’s strategic. Founders and finance teams can stay ahead by engaging with a tax expert. In addition, consider:
- Mapping nexus exposure across states and updating this quarterly;
- Reviewing product and service taxability regularly;
- Tracking and validating exemption certificates; and
- Automating compliance through reliable software tools.
A thoughtful sales and use tax strategy preserves your runway, builds investor trust and prevents costly distractions down the road.
Heather Ake is Burkland‘s indirect tax and compliance director. She has 25 years of industry and tax consulting experience. Since joining Burkland, she has significantly developed and expanded this practice area. Her substantial tax expertise spans sales/use/gross receipts, excise, and property tax, gained through various roles in public and private industry, and consulting — progressing from tax accountant to director. Her knowledge of tax law across diverse industries has positively influenced the key financial performance of the businesses she has served.
Illustration: Dom Guzman
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