In 2018, sales tax became much more complicated for companies overnight. That’s because in June of that year, the United States Supreme Court ruled in a 5-4 decision in South Dakota v. Wayfair, Inc., et al, that states can generally require an out-of-state seller to collect and remit sales tax even if the seller has no physical presence in the consumer’s state.
“Wayfair changed sales tax for so many businesses, including Chatmeter,” says Nichole Peterson, VP of Finance at Chatmeter.
Fast-forward to 2020, and Nichole and her Chatmeter team discovered that they did in fact need to be charging sales tax.
Unfortunately, they had not been.
A ‘classic situation’: Inside Chatmeter’s sales tax dilemma
“Historically, Chatmeter was a pretty classic situation,” says Nichole. “We only operated in one state, meaning we only had a physical presence in one state and therefore, did not believe we needed to charge sales tax because California doesn’t levy sales tax on SaaS services, which is 99% of our revenue. So, once we determined that Wayfair did in fact impact Chatmeter, we realized that this was a pretty complicated issue. We needed to unwind it.”
And unwind it they did.
Determined to make things right, Nichole and her team went to work—grinding day and night for two full years to get Chatmeter to a state of sales tax compliance.
Making it right: How Chatmeter became sales tax compliant
Nichole notes the first step in the process was to undergo a Nexus study. They partnered with prominent accounting firms to look at:
- What was triggering Nexus
- Was it transaction volume?
- Was it revenue?
- Was it the number of invoices they were sending?
This was just the beginning. Once Nichole determined where Chatmeter had Nexus, they had to dupe the returns or go through the voluntary disclosure (VDR) process. In the VDR process, Nichole explains how you essentially “go to the state saying, ‘Hey, mea culpa. I messed up. I needed to be filing sales tax returns. I owe you ‘x’ dollars. And, if I pay you that and file this, you’re not going to come after me. You’re not going to charge me additional fines or penalties.”
In other words, the VDR process is a plea for forgiveness. A painful plea for forgiveness, that is.
Next, Nichole and her team had to go back to hundreds of clients and investigate whether those clients had self-assessed. When a company self-assesses, they go to the state with their sales tax returns and tell the state that they were supposed to pay sales tax on xyz invoices but did not.
If a company hadn’t self-assessed, Nichole had to find out if they were sales tax exempt.
If this process sounds a lot like putting a puzzle with missing pieces together, you’re on to something—because that’s exactly what it’s like.
“We needed to cover our bases and make sure all of our ducks were in a row,” says Nichole. “In addition, going back to these clients and trying to charge them the back sales tax was not an option. That is not how we would do business. So, we needed to cover those back sales taxes ourselves.”
The costs of becoming sales tax compliant
Of course, becoming sales tax compliant is a good thing. But when you realize you need to go backwards in order to do so, it becomes expensive, time-consuming, and downright intimidating. It’s costly, and money, time, and energy that haven’t been allocated toward such a process are now absolutely necessary to make things right.
“In a nutshell, it slowed down the business,” says Nichole. “From a financial perspective, getting to a state of compliance—between the Nexus study, back returns, the VDRs, and covering those back sales taxes—turned out to be a seven-figure project. Almost a million dollars diverted from business needs, such as investing in the product or marketing, had to be diverted to become sales tax compliant.”
Such a hefty price tag will give anyone pause and make them think about shelving the project. Nichole is no different. “When you see big figures—$750,000–$1,000,000—it makes you want to choke. It makes you say, ‘I don’t want to do this.’”
But then Nichole reminds us of the golden rule of anybody working in finance—the ultimate responsibility of someone in her position:
“However, my role is to make the numbers right, not to make the numbers pretty.”
Listen to the podcast to see how Nichole made—and continues to make—the numbers right
Check out the full episode with Jake Jones, Multimedia Producer at Zone & Co, and Nichole Peterson, VP of Finance at Chatmeter, to learn:
- How Covid-19 was the catalyst for Chatmeter’s compliance revolution
- What financial information systems Chatmeter relies on now to move fast and maintain 100% sales tax compliance
- How finding the right systems has enabled Nichole to add value in more areas of the business beyond tax compliance
Quote of the episode
“I always say the most complex sales tax system is when you don’t have one. To me, that includes software. If you don’t have a compliance methodology, or software to manage this, it’s going to be really hectic.” – Nichole Peterson
Listen to the full “Risky business—why sales tax is no joke” episode here or wherever you get your podcasts.