What were the pre-existing tax and compliance challenges of SaaS and subscription revenue companies before Anrok?

Sales tax is a pretty new problem for many SaaS companies. It's not something that most California-based software companies have had to worry about before. The reason why it is top of mind now is twofold. One is the rise in remote work. Many founders don’t realize having a remote employee in a state creates an immediate sales tax obligation. Number two is legislative changes that have happened in the past few years, specifically following the Supreme Court case South Dakota v. Wayfair.

What might not be obvious to founders and finance leaders is that, if sales tax is not collected from the customer, it comes out of the company's pocket and impacts revenue. So to your question, there were three common paths to handle sales tax and compliance before Anrok.

Number one was to hire an outside firm to periodically monitor where you have an obligation to collect and pay sales tax and to calculate the sales tax that is actually due. Outside firms are valuable for providing tax advice, but the problem is that they can’t add tax into the invoicing flow in real-time. You need software unless you’re ok with playing catch up and paying the sales tax out of your own pocket after the invoice has been sent and paid.

The second way was to try to make legacy solutions work. There are a few generalist sales tax tools that were built for the brick-and-mortar world. These are solutions that are 20 to 30 years old, and are hard to integrate. They need user configuration to make sure they capture the edge cases for software. Moreover, they often require dedicated engineering resources.

Then the third option was to ignore it. This is expensive from both a time and cost perspective down the road. The typical SaaS startup is selling in over a dozen states in the U.S., and they could be audited by several states in a given year. That's a big time and possibly monetary cost to manage retrospectively. And when you're not collecting and remitting sales tax, you're accruing interest and penalties on top of the sales tax that you would otherwise collect from the customer. It's much cheaper and easier to comply when you start selling in a state from the get-go, rather than to try to catch up later.

Sales tax can make a pretty big impact to a company's bottom line. For the average SaaS company, it can be around 4.3%, and it can be as high as 11%, depending on which states a company is mainly selling to. If a company is doing a lot of business in high tax states that do tax software, like New York or Texas, non-compliance can really add up.