Risky business - why sales tax is no joke

Jake 

I’m your host, Jake Jones, Multimedia Producer and Brand Influencer at Zone & Co, and I’m joined this week by Nichole Peterson, VP of Finance at Chatmeter. Thanks for joining us today, Nichole. 

Nichole

Thanks for having me, Jake—happy to be here.

Jake

Last episode, we were introduced to the complexities of sales tax. Just talking through all the rules and stipulations can be hard to follow. Now imagine how hard it must be to deal with this in practice—if you aren’t dealing with it already. Today, Nichole is going to share some of her experiences at Chatmeter dealing with sales tax compliance. Nichole, can’t thank you enough for joining us today and we’re really excited to hear about your experience dealing with sales tax and the complications that come along with it. But before we get into the topic, I do want to hear a little bit more about you. So tell us about yourself and what you do for Chatmeter. 

Nichole

Absolutely! On a personal level, I’m a California native. Currently I reside in Utah with my husband and our two-year old son and a couple of dogs. We absolutely love to travel as a family, and we spent a year as a family during covid living in an RV and traveling the country while I was working. So, adventure is in our blood. Professionally, I’m the VP of Finance at Chatmeter. In my role, I’m focused on being a business partner with many of our departments, including the customer success team, where I drive renewals, pricing discussions, and validate deal details between Salesforce and the actual contract that’s signed. I also get to work with a fantastic accounting team that I’ve had the pleasure of building over my 2.5 years at Chatmeter. We are responsible for all of the finance and accounting functions at Chatmeter, including vendor side, customer side, payroll. Basically, if it involves a number, we see it. Which also means, I am heavily involved in tax—from sales tax, income tax, the audit side, insurance, banking…I get to see it all. Which means I’m wearing a lot of hats. The last part of my role—that’s very near and dear to my heart—is that I’m responsible for our finance information systems. I’ve implemented most of these systems over the last couple of years. These systems include NetSuite, ZoneBilling, Avalara, and MineralTree. 

‍Jake

That’s awesome. I’ve had some family do the RV thing as well, so it’s really cool to hear that you had a lot of fun. Thanks for shouting out a lot of our partners there. It’s so exciting to know that you guys have been working with a lot of solutions and that’s what we’re going to get into—about how you got to those solutions. In our last episode we had some of our partners from Avalara talking about the complexities of sales tax, and we’ve asked you on today because, as you said, in your job you wear a lot of hats and one of those hats is dealing with tax. So, we just want to hear about your experience and what it’s like to deal with the real-world complexities of sales tax. What does it really look like to deal with the complex sales tax system?

Nichole

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. As we all know, Wayfair changed sales tax for so many businesses, including Chatmeter. In 2020, we determined that Chatmeter did in fact need to be charging sales tax. We had not been. Historically, Chatmeter was a pretty classic situation. 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. All fifty states have different tax rules. In some instances, it’s not even just the state—it can go all the way down to the zip code, which means doing this by hand is just not feasible. So, as I mentioned, in 2020 we determined that we needed to change. For two years, we worked day in and day out to move Chatmeter from [AC APAC Compliance] to a state of sales tax compliance. We started this project by undergoing a Nexus study, partnering with major accounting firms to look at where we had Nexus, what’s triggering Nexus. Was it physical? Was it dollars, meaning revenue dollars? Was it the number of invoices we were sending? Once we determined where we had Nexus we had to dupe the returns or go through the VDR process. The VDR process is ‘voluntary disclosure’. More or less, you 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.” It’s kind of a last-ditch effort, get-out-of-jail-free card. Doesn’t mean it’s not painful. Additionally, we had to go back to hundreds of clients and assess whether those clients had self-assessed, meaning they went to the state with their sales tax returns and said we needed to pay sales tax on this invoice, and did not. Or, if they were sales tax exempt. We needed to cover our bases and make sure all of our ducks were in a row. 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. 

Jake

You brought up so many points we hit on last episode too, just talking about how complex it is. Every state obviously has different laws, but then you look down to the zip code, and that can determine things which is such a nightmare to think about. Hearing that it was a two-year project to get you guys compliant—that is wild to hear. Again, love that you guys started with a Nexus study. That’s something one of our Avalara team members mentioned that was such a crucial part and a great place to start if you’re looking at dealing with these sorts of things. Something that you mentioned here, though, that we didn’t talk about—and I haven’t even thought about—what if your clients had gone back and somehow covered the tax misplacement themselves? What if they’ve already resolved this issue? That might save you some money, but what if you had paid it double? That would’ve cost you funds. Now, one thing I’ve been curious about is, as you talk about this being a two-year process to fix, did this complicated sales tax system slow down the business at all? Obviously, your team and the accounting team was very busy dealing with this, but what other sorts of effects did it have on the business? 

Nichole

Absolutely. In a nutshell, it slowed down the business. Not just because there’s work to be done around the Nexus study and VDR. In terms of time and resources, it’s costly. 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. 

Jake

That is huge. And such a scary number to hear. Was that almost a hindrance for you guys to want to fix this? Or were you guys just relieved to know you fixed this, and almost a million dollars is back to where it needs to be. It’s not going to come back and chase us down. I’m curious. I’m the type of person, I would probably want to push that down until it gets worse. But I’m just curious how that went on y’all’s end. 

Nichole

Yeah, of course, right? 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. However, my role is to make the numbers right, not to make the numbers pretty. And to ensure compliance because, as a tech company—really as any company—you have to be compliant when it comes to your taxes. Whether that be sales or income tax or any other complicated tax that you may be obligated to pay because, hypothetically, if you’re going through a sales transaction or a raise or debt funding, for any transaction, the other party or parties will be pulling compliance data and, if there’s a nervousness over taxes that were not paid that could potentially stall or even completely dismantle the potential deal. So, again, my role is to make sure that that doesn’t happen at Chatmeter. 

Jake

That’s great, and thank you for being so open and so candid about that. It seems like such a scary thing to address, but as you said, you need to be compliant—it can really come back and hurt you later. So, thanks for sharing that. One thing you mentioned was that in 2020 was when you guys noticed something wasn’t right. What was it that happened that made you guys realize that something is wrong, that we are misplacing this and that we need to make a change? 

Nichole

So, in 2020, I’d say directly as a result of covid, Chatmeter became a company with a remote workforce. I mentioned how, personally, we lived and traveled the country in an RV during covid. We had many employees who left California during covid to live in other states. We also started hiring employees outside of California. Pre-covid, Chatmeter had a mainly California-based workforce, and as you start hiring other employees in other states, you get on the radar because you’re filing employee tax returns or paying the holding taxes through your employee payroll. Believe it or not, those tax agencies within different states, they talk to each other. So once you’re on the radar for withholding taxes, you’re probably going to be on the radar for income and out-of-state sales tax. 

Jake

There’s not a lot of hiding that can be done. It’s only a matter of time before something comes up, something gets overturned, and they find you. So interesting to hear what happened with covid and your workforce, which is still happening now, such an important thing, that some companies may be doing but not completely thinking through, and how that’s going to affect something like sales tax. We talked about it at the beginning—how you installed a lot of our partners, including Avalara. So let’s talk about how you found a solution and what that’s looked like. 

Nichole

We know that in order to truly become sales tax compliant and to move at the speed we like to move at, we needed to upgrade our financial information systems. I’d already been looking at implementing NetSuite, so we bundled Avalara into that go-live date and it actually went live on both systems the same day. Yes, it was a lot of work. But, it was simpler in the long run to have everything streamlined and set on one date. There were no two systems to work with because of the fact that Avalara is just integrating right in NetSuite. I needed a complete end-to-end solution that would calculate sales tax, add sales tax to our customer invoices, remit the funds to the appropriate jurisdictions, and timely file the returns. I didn’t have the budget to add a headcount to do this work, nor did I think that was sufficient in the long term. 

Jake

And so what has that been like, since you guys have gotten these systems implemented? I’m sure it’s a learning curve every day, but what has it been like?

Nichole

Systems are, as you said, a learning curve. But, automation is a beautiful thing. The work to set up all of these systems was a heavy lift, but now that it’s been in place for almost two years, you could say sales tax runs itself. The collection happens automatically in the remittance process—it happens behind the scenes. Our only involvement is to review the returns each month and ensure that data between Avalara and NetSuite is reconciled properly. 

Jake

I’m sure that’s probably such a huge relief off of your workload and pressure. Obviously there’s still involvement there but it seems like it’s made it a lot easier. What is that like? So now that you’ve found the solution, how has that changed the business and your role as a leader in finance? How has that changed your day to day? 

Nichole

I would say yes, it is opening up to new opportunities, in that finding and implementing Avalara, as well as being sales tax compliant, has decreased our risk in this area. It allows us to focus on other initiatives. One of those is automating our customer invoicing process and then as I talked about earlier, my role has changed, in that I’m very involved with our customer service team and our contract renewals processes. I couldn’t be working on those things and contributing to the business in that way if we had to worry about sales tax compliance. 

Jake

Nichole, thanks for sharing all of this. This has been so great. Love to hear you say that—that you’re getting to work with your customer success team and really you’re able to focus on growing the business. Before we go, is there anything else you’d like to add? Maybe some last-minute advice for a company that maybe knows this is something they need to be worrying about or focusing more on? What would you say to them?

Nichole

My advice would be that if you believe you’re at risk for being sales tax non-compliant, start this process sooner than later. Maybe it won’t be a two year process. For Chatmeter, it was. But, prep your exec team, prep your board, get everybody on the same page about how you’re going to approach it, and get started. It’s a beast, but you will survive. 

Jake

Well Nichole, this has been a great conversation just talking all about your journey with sales tax compliance and the two year project that Chatmeter took on. So excited to know that you found a solution and were able to get to compliance. Again, thank you for sharing what that journey looked like, some of the real-world applications of how difficult it was, and just really appreciate your candor there. Thanks for being on the show—we really appreciate it. 

Nichole

Jake, thanks for having me. It was my pleasure—I enjoyed the conversation.