Understanding Sales Tax for Startups: A Compliance Guide

In the crowded corridors of startup urgency—where teams race to ship product, raise capital, hire engineers, and chase growth—few topics fall further down the priority list than sales tax. Yet, in my thirty years of advising and leading startups from Series A through D across multiple industries, I have seen no small number of promising companies blindsided by its silent complexity. Sales and use tax compliance, often dismissed as a back-office concern, has delayed acquisitions, triggered audits, consumed working capital, and eroded trust with investors. Worse still, many founders don’t realize their exposure until a diligence team or state revenue authority surfaces it for them.

This essay provides a clear, strategic primer on the mechanics of sales and use taxes, and the often misunderstood role of reseller certificates. It is not a tax code deep dive. Rather, it is a guide for executives and operators who want to move from accidental non-compliance to intentional control, and from silent risk to operational clarity.

Sales Tax Is Not Just for Retailers

Sales tax is a transaction tax—imposed by states and some localities on the sale of tangible personal property, and increasingly, digital goods and services. While it traditionally applied to brick-and-mortar businesses, the post-Wayfair legal landscape has expanded its reach dramatically. In 2018, the U.S. Supreme Court’s ruling in South Dakota v. Wayfair gave states broad authority to impose sales tax collection obligations on out-of-state sellers based solely on economic presence, not physical presence.

The result is that SaaS companies, subscription platforms, and service firms—once assumed to be outside the scope of sales tax—now find themselves entangled in a growing web of state-by-state requirements. Nexus, the threshold that triggers tax obligations, can be created not just by revenue, but by headcount, fulfillment partners, or even a marketing affiliate in a state.

For startups, the challenge is twofold: first, determining whether they have nexus in a state, and second, whether their product or service is even taxable under that state’s laws. The definitions are anything but uniform. Some states tax digital goods. Some tax cloud-based software. Others exempt services entirely. The friction lies not in the tax itself, but in the administrative burden of knowing where and how to comply.

Use Tax: The Forgotten Companion

While sales tax applies to sales made by the company, use tax applies to purchases made by the company. It is the flip side of the same coin—and just as important.

Use tax is triggered when a company buys taxable goods or services from a vendor that did not charge sales tax. This often happens in online transactions, out-of-state purchases, or dealings with foreign suppliers. The obligation then shifts to the buyer to self-assess and remit the applicable tax to the state. Ignoring this responsibility can accumulate into a significant liability.

In practice, most startups do not account for use tax. Their AP systems do not flag non-taxed invoices, and their accounting teams, often lean and reactive, do not reconcile use tax obligations monthly. But state auditors do. And when they examine purchases during a multi-year audit window, they expect use tax compliance to match sales tax rigor.

I have seen companies hit with five-figure assessments during routine sales tax audits, entirely due to unpaid use tax on software subscriptions and equipment purchases. These were not intentional oversights. They were structural blind spots—habits formed when the company was small that persisted into scale.

Reseller Certificates: A Shield, Not a Loophole

One of the most misunderstood tools in the tax compliance toolkit is the reseller certificate. It is a document issued by a buyer to a seller, certifying that the goods being purchased are for resale and therefore exempt from sales tax.

At a glance, this seems like a clever way to avoid tax. But it is not a loophole—it is a legitimate exemption grounded in the principle of avoiding double taxation. Sales tax is meant to be paid by the end user. If a company is purchasing inventory or components to resell as part of a finished product, collecting tax at both stages would be redundant.

However, reseller certificates come with responsibilities. They must be properly completed, state-specific, and on file before the transaction occurs. They are not universal. A certificate issued in California is not valid in Texas unless the seller accepts it under a multi-jurisdiction form like the SST (Streamlined Sales Tax) certificate—and even that depends on the state’s participation in the program.

Startups that buy and resell physical goods—or even digital licenses—must maintain up-to-date reseller certificates to avoid audit risk. Sellers must validate and retain these certificates as part of their tax records. Failure to do so means the seller, not the buyer, may be liable for uncollected tax in the event of an audit.

I once advised a B2B SaaS company that bundled third-party tools into its platform and sold the composite service. The company treated its vendor purchases as exempt, assuming the resale exemption applied. But it had no certificates on file. During an audit, the state assessed sales tax on all inbound invoices—plus penalties and interest. It took months, and legal assistance, to mitigate.

Why This Matters Before M&A or Venture Diligence

Sales and use tax non-compliance may go unnoticed for years. But when a company raises capital, or prepares for acquisition, these gaps surface with urgency. Buyers and investors conduct nexus studies, examine tax registrations, and request transaction-level reports. Any inconsistency—such as unregistered nexus states, missing exemption certificates, or unpaid use tax—becomes leverage in negotiations.

I’ve seen otherwise clean term sheets slow down as tax exposure is quantified. In one case, a late-stage startup was asked to escrow $600,000 to cover potential sales tax liabilities in six states. The deal still closed, but at a valuation haircut that dwarfed the cost of proactive compliance.

Tax risk is pricing risk. It affects the perceived quality of earnings, the stability of systems, and the integrity of financial reporting. Founders and CFOs who treat sales tax as a strategic input signal maturity. Those who leave it to chance invite discounting.

Building Compliance into the Workflow

The good news is that sales and use tax compliance can be operationalized. Several modern platforms—such as Avalara, TaxJar, and Vertex—offer real-time tax calculation, nexus tracking, and certificate management. When integrated with your ERP or billing platform, they reduce manual effort and increase audit readiness.

But tools alone are not enough. Teams must build a tax-aware culture. This means tagging invoices correctly at the point of entry, validating vendor charges, registering promptly in new states, and educating customer-facing teams about tax implications of sales terms.

It also means reviewing nexus exposure quarterly, not annually. In a remote-first world, a single hire can trigger new filing requirements. Sales tax must be part of your expansion checklist—just like HR, legal, and data compliance.

Don’t Delegate What You Don’t Understand

Founders often assume that their bookkeeper, CPA, or fractional controller is handling sales tax. But unless it is explicitly scoped, it may not be. Sales tax is often outside the domain of standard bookkeeping. It requires state-specific knowledge, proactive tracking, and clear responsibility. Delegating without oversight is the fastest way to accrue invisible liabilities.

Instead, establish clear accountability. Assign a point person—whether internal or external—to own sales and use tax compliance. Ensure that roles are defined, systems are configured, and policies are documented. And most importantly, integrate sales tax into your broader financial governance discussions. If you review burn, cash flow, and margin monthly, you should also review tax compliance at least quarterly.

Sales Tax Is Not Optional

In the final analysis, sales and use taxes are not elective. They are a function of doing business. Companies that ignore them do not save money. They defer risk. The exposure is cumulative, interest-bearing, and often discovered too late to remedy without pain.

But compliance is not difficult when embedded early. With the right systems, advisors, and cadence, sales tax becomes predictable and low-friction. And in a capital market that increasingly values operational rigor as much as product innovation, that matters.

Founders who understand tax will not be rewarded with headlines. But they will be rewarded with trust—from buyers, from investors, and from their own employees. That trust, over time, is worth far more than any single line on a term sheet.

Disclaimer: This blog is intended for informational purposes only and does not constitute legal, tax, or accounting advice. You should consult your own tax advisor or counsel for advice tailored to your specific situation.