Investors Are Asking About Sales Tax.
Here's What They Want.
Sales tax compliance is a standard due diligence item for Series A and beyond. Better to address it now than explain a liability during closing.
Why Investors Care About Sales Tax
- 1.It's a known liability. If you have nexus and aren't collecting, you owe money. That's a balance sheet issue.
- 2.It affects valuation. Expected tax liabilities reduce enterprise value dollar-for-dollar.
- 3.It signals operational maturity. Not knowing your tax obligations suggests other compliance gaps.
- 4.It's easy to fix early. VDAs limit lookback. Waiting makes it worse.
What Due Diligence Typically Covers
1Nexus Footprint
They'll want to know where you have sales tax obligations:
- • Where are your employees located?
- • Where is your revenue concentrated?
- • Do you have any physical presence (offices, inventory, contractors)?
- • Which economic nexus thresholds have you crossed?
2Current Registration Status
For each state where you have nexus:
- • Are you registered?
- • When did you register?
- • Are your filings current?
- • Any open audits or assessments?
3Historical Exposure
The big question: what do you already owe?
- • Revenue by state for the lookback period
- • When nexus was established in each state
- • Estimated uncollected tax liability
- • Any VDAs filed or in progress
4Go-Forward Compliance
How are you handling it now?
- • Tax calculation software (Avalara, TaxJar, etc.)?
- • Exemption certificate management?
- • Filing process and frequency?
- • Who owns compliance internally?
Red Flags That Slow Deals Down
"We don't collect sales tax anywhere"
If you have significant revenue, this is almost certainly wrong.
"Our accountant said we don't need to"
Most CPAs aren't SALT specialists. This needs verification.
"We don't know our revenue by state"
You should be able to answer this. Get your billing data sorted.
No exemption certificates for B2B customers
In states that require them, you're on the hook for the tax.
What to Prepare Before Due Diligence
The Good Answer
"We've done a nexus analysis and identified obligations in [X] states. We're registered in [Y] of them and filed VDAs in [Z] to address historical exposure. We use [software] for ongoing compliance. Here's our state-by-state breakdown."
To get there, you need:
When to Address This
Before you start raising
Run a nexus analysis. Identify gaps. Start VDAs if needed.
During term sheet negotiation
Disclose known liabilities. Better from you than their lawyers.
During due diligence
Have documentation ready. Delays here are expensive.
At closing
Too late. Surprises here kill deals or cost you money.
Start With Your Nexus Analysis
Get a clear picture of where you have obligations. Takes 3 minutes, and you'll have something concrete to show your investors.
Run Nexus Analysis