The Global Sales Tax Challenge for SaaS Companies - with Michelle Valentine, Founder and CEO Anrok

**Ray Rike** (0:00)
Hello, I'm Ray Wright, Founder and CEO of Benchmarkit, and your host of the Metrics It Measure Up podcast. We talked to a wide variety of the top B2B SaaS and Cloud thought leaders, CEOs, executives, investors, and people just like you, to discuss the metrics and benchmarks they use to make metrics informed and benchmark validated decisions. Now, on to today's show. Welcome to today's episode of the Metrics That Measure Up podcast. Today, we are joined by Michelle Valentine, the co-founder and CEO of Anrok. Today, we'll be covering four primary topics with Michelle. First, the evolution of SaaS sales tax and compliance. Second, the unique challenges of global sales tax compliance for PLG companies. Third, the dynamic nature of sales tax treatments, both in the US and globally. Then lastly, a little bit about Michelle's own journey in the evolution from investment banker to VC, to product manager, now founder and CEO. With that, Michelle, would you mind taking a moment to give a brief overview of your journey to becoming a guest on the Metrics that Measure Up podcast?

**Michelle Valentine** (1:27)
Excited to dive in. I'm the co-founder and CEO at Anrok. For those that aren't familiar, Anrok is the modern tax-compliance solution for software and digital businesses, specifically US sales tax as well as global VAT worldwide. Prior to Anrok, I was both in the product seat at an early-stage startup, as well as being in the investor seat at a venture capital firm, investing in software and infrastructure companies.

**Ray Rike** (1:57)
Okay, perfect. Well, you did have an amazing varied background from not only an incredible educational pedigree, but from being an analyst, an investor, a product manager, and now a founder. So tell me a little bit about your founding of Anrok. Was there a catalytic moment when you knew that global sales tax compliance was a big enough issue for a SaaS startup?

**Michelle Valentine** (2:25)
Yes. In many ways, my experience in investing and looking at the why now really made the tax issues stand out to me when I first came across it. So the backstory is that I was on a run with a friend who was the head of finance at a company at the time along the Embarcadero, and she was complaining about this new tax problem. And for any investor, when someone says, hey, we have a new problem and it's greenfield, the light bulb goes off and you pay attention. Wait, this is a problem that every software company now has, in a new way, that hasn't happened before. That's odd. So that really was the genesis of me starting to be interested in the tax problem. And specifically for software companies, you might even remember Amazon back in the day, maybe about 10 years ago or even 15 years ago, you didn't always see sales tax on your e-commerce sales from Amazon. And it was only in about 2015, 2016, Amazon started collecting sales tax in all of the states in the US that would charge sales tax on the products that they would sell. So that wave has really hit e-commerce and that is happening now in software.

**Ray Rike** (3:43)
Well, you mentioned running along the Embarcadero, when it's someone who lived in San Francisco for 35 years, it brings back kind of a moment of history and nostalgia for me. But speaking of nostalgia, let's talk about something we talked about preparing for this show, and that was kind of the physical nexus of sales tax versus the economic nexus, because I think it provides a really interesting foundation for the rest of our conversation.

**Michelle Valentine** (4:11)
Yes. So I mentioned two things changed. The first has to do with the rise of remote physical nexus, and the second is the introduction of economic nexus in 2018
So maybe to backtrack and tell you a bit about the history of sales tax, in the 1920s, sales tax was introduced in the Great Depression as a way to help local governments meet their budget deficits. And it was really built around this concept of a retail store and physical presence. And so historically, a business only needs to think about sales tax and collect sales tax from its customers if they have a physical store, a physical office, or some physical presence in that state. And once they've met that threshold, you now then figure out, okay, is the product I'm selling, is it taxable or not? And if so, you then apply the tax rate of that location to then collect from your customer. And so for a lot of software companies that are based in California, California does not tax software. And so if you just had a physical location, an office in California as a software company, you did not need to collect sales tax. And then the first thing that changed was really the rise of remote, which only got accelerated in the pandemic, where every software company really became a remote company. And so that is the first piece. The minute you hire a remote employee in a state that taxes your product, you now need to collect sales tax in that state. So some examples of states, New York, Texas, Washington, these are some of the 20 plus states that do tax software. The second thing that changed was this concept of economic nexus, which really was the government's catching up to the fact that a lot of the economy is now online, and many businesses might never have a physical location or physical warehouse or presence in that state. So in 2018, there was a Supreme Court case called South Dakota versus Wayfair that introduced this idea that if you cross some revenue threshold or transactional threshold as a business, you now had the equivalent of nexus and have to collect tax on sales to customers in that state. An example threshold in Washington is $100,000 in revenue, for example. And once you cross that, every transaction now becomes taxable in that location. And the interesting thing is, if you don't collect that tax from a customer, you as a business now need to still remit on behalf of the customer. So it really does impact your business if you forget to do this.