This article was first published by Forbes.

As a tax partner working with growing technology companies, my main focus for clients is often more on mitigating risk than structuring business operations for income tax efficiency. On the journey from seed rounds and angel investors to liquidity events and public offerings, my clients’ investors and stakeholders are focused on growing a customer base and adding recurring revenue as millions of dollars go into development and sales teams that are built to supercharge growth. The silver lining of all that spending is that income tax charges are usually not a part of the assessment—but this doesn’t mean there aren’t plenty of tax traps for the unwary technology company on the way to an IPO.

The largest of these tax traps is the sticky and growing web of state and local taxes. As recently as 10 years ago, a business could generally use a physical presence standard to determine where tax filing requirements were needed. This was generally protected by a law known as Public Law 86-272, which limited the ability of states to tax commerce of businesses residing and operating in other states. Challenges to this law began in 2012 when California introduced an “Economic Nexus” standard for “Doing Business in California.” From that point forward, simply having customers in the state of California could result in the imposition of California income tax on an out-of-state business.

Fast forward 10 years, and U.S. Supreme Court case South Dakota v. Wayfair Inc. (Wayfair) and the explosion of remote workforces as a result of Covid-19 have made state taxes a growing burden for all companies, including SaaS, software and digital media companies. While it can feel overwhelming, there are three areas in particular that technology companies should be mindful of as they grow:

Sales tax and situs

‘Tangible’ versus ‘intangible’ goods

The remote workforce

While certain technology companies may not have sales tax exposures to worry about, almost every business has been forced to consider the possibility of adding to a remote workforce, and the benefits and burdens of those decisions. Telecommuting employees can lead to nexus for sales tax, income tax, franchise tax, property taxes and withholding taxes in a state regardless of whether or not you hire with the help of a PEO or not. These filing requirements are even more complicated for companies with main offices in states that maintain a “Convenience of the Employer” rule. Without a bona fide office in that new state, New York could try to claim that an out-of-state employee owes payroll and withholding tax to New York. Even for companies trying to do the right thing, these rules and risks of double taxation lead to uncertainty.

For growing technology companies, the complex ecosystem of state taxes can feel challenging, to say the least; especially with the increase of remote work and the increased use of digital services. Keeping these three areas in mind as your company grows can help as you navigate the tax landscape.

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