You Are Accidentally Evading Taxes in 15 States.
I reviewed a startup's financials last month. They are a fully remote team. Incorporated in Delaware. No physical office. Revenue: $3M ARR. I asked the CEO: "Are you collecting Sales Tax from your customers in New York?" He laughed. "We don't have an office in New York. We are a digital company."
I didn't laugh. I showed him the "Wayfair" Economic Nexus map. He was currently liable for $80,000 in uncollected taxes across 15 states. Since he never collected it from the customers, he has to pay it himself. That is $80k straight out of his profit margin (which didn't exist).
This is the 'Sales Tax' Time Bomb. In 2025, physical presence doesn't matter. "Economic Presence" does. Here is how you are likely breaking the law and how to fix it before the audit letter arrives.
1. The "200 Transaction" Trap
You know the $100,000 rule. "If I sell $100k in a state, I owe tax." But you forgot the Transaction Count rule. In many states (like Illinois, Georgia, Maryland), the threshold is 200 transactions.
The B2C Trap: If you sell a $10/month subscription:
- You only need 17 customers in a state to hit 200 transactions a year (17 users x 12 months = 204 transactions).
- Your revenue is only $2,000, but you legally have "Nexus."
- You must register, collect, and remit tax on that $2,000.
If you don't, the state can audit you for the last 7 years. They don't care that you are a "small startup." They care that you hit the transaction count.
2. The "Taxability" Matrix (It’s a Mess)
"SaaS is taxable everywhere, right?" No. "SaaS is tax-free everywhere, right?" No. It is a nightmare of local laws.
- New York: SaaS is Taxable. (You must collect ~8.8%).
- California: SaaS is generally Exempt (if no physical media is sent).
- Texas: SaaS is Taxable (but only 80% of the price is taxable).
- Massachusetts: Taxable.
If you use Stripe and just turn on "Automatic Tax" without configuring these settings, you are either:
- Over-collecting (Customers will sue you).
- Under-collecting (The State will sue you).
3. The "Retroactive" Audit
This is what kills the business. When a state finds you (and they will—they crawl LinkedIn to see where your employees live), they audit you retroactively.
The Math of Ruin:
- You sold $1M in New York over the last 3 years.
- You didn't collect the 8.8% tax ($88,000).
- The Audit: You owe the $88,000.
- The Penalty: +30% for "Failure to File."
- The Interest: +10% per year.
- Total Bill: ~$140,000.
You cannot go back to your customers and say: "Hey, remember that software you bought in 2023? Can you send me $8 for the tax?" They will block your email. You pay this bill. If your startup has $50k in the bank, you are bankrupt.
The Real Numbers: Compliance Cost vs. Risk
I compared the cost of ignoring the problem vs. solving it.
| Scenario | Cost Today | Future Liability (3 Years) |
|---|---|---|
| Ignore It (Head in Sand) | $0 | $250,000+ (Tax + Penalties) |
| Manual Filing (Spreadsheets) | $5,000 (Accountant) | High (Human Error risk) |
| Automated (Anrok/Avalara) | $15,000 / year | Low |
| Merchant of Record (Paddle) | 5% of Revenue | $0 (They take the liability) |
The Verdict: If you are small (<$1M ARR), use a Merchant of Record like Paddle or Lemon Squeezy. They technically "buy" your software and resell it, so they handle the taxes. It is worth the 5% fee to sleep at night.
Frequently Asked Questions (That CFOs Panic About)
I use Stripe Tax. Am I safe?
No. Stripe Tax calculates the tax. It does not File the tax. Stripe tells you: "You collected $500 in Ohio." You still have to:
- Go to the Ohio.gov website.
- Register your business (get a Tax ID).
- Fill out the monthly form.
- Send the check. If you just collect the money and keep it in your bank account, that is technically Criminal Tax Fraud (Theft of State Funds).
Does this apply to International sales?
Yes.
- Europe (VAT): You owe tax from Dollar One. There is no "200 transaction" threshold. If you sell to one person in France, you owe VAT.
- Canada (GST): Strict thresholds ($30k CAD).
- The Fix: Again, use a Merchant of Record (MoR). Do not try to register for VAT in 27 EU countries yourself. You will go insane.
When should I register?
Only when you hit the threshold. Do NOT register in all 50 states "just in case." Once you register, you have to file a return every month (even if it's $0). It creates infinite paperwork. Monitor your sales. Register only when you cross the $100k or 200 transaction line in that specific state.
Leon Staffing connects founders with fractional CFOs who specialize in SaaS Compliance. Don't let a $10 subscription bankrupt your company. Get a tax audit check here.