One of the more challenging areas of running a software company is anticipating the legal and tax laws, which can change rapidly. My partners and I have often put ourselves at a disadvantage in this area. We ensure we adhere to these rules and prioritize them over our personal benefit. Many of our competitors play by different rules; They take legally risky bets and pay up when they have to. ServiceMonster can’t do that - I don’t have a $2M ‘in-case-we-get-caught’ legal fund.
One good example is the state-by-state tax law known as Sales Tax Nexus. It defines the level of connection between a business and a taxing jurisdiction. When a nexus determination is made between a state and ServiceMonster, we are responsible for collecting and paying sales tax on our services. Some states don’t have nexus. Others might want to charge us only for ServiceMonster CRM or our direct mail services (FillMySchedule), while other states may require sales tax on both.
States see their population as a commodity. If we gain access to that market in any meaningful way as defined by the state, and the state has nexus determination events, we could be required to collect sales tax from our clients in that state.
Until recently, we have steered clear of nexus determination, which has limited our growth in many ways. A common nexus determination can happen if we pay a non-employee (commonly referred to as an affiliate) for leads or sales to the state in which the affiliate lives. Keep in mind that it has nothing to do with sales of ServiceMonster related to the affiliate. When a state makes a nexus determination, we must collect taxes for all the revenue in that state.
For the last 20 years, ServiceMonster has had nexus in only one state: Washington, where our business is legally registered. For the last 20 years, we have paid sales tax for our Washington state customers on their behalf. Rolling state-by-state sales tax into our operating expenses is not a sustainable model.
ServiceMonster is pushing several growth initiatives in 2023, including adding an affiliate network (if you want to get paid for bringing us ServiceMonster clients, let’s talk). Last year I asked our development team to make all the necessary changes to identify nexus state-by-state, locate the correct sales tax for a client’s jurisdiction, and apply that sales tax to monthly or yearly charges for ServiceMonster services.
What does all this mean for you? As I’ve said, currently, we only have nexus in one state, Washington. Washington state clients will soon see a change to their bill reflecting the sales tax we collect for the state. Most of our clients will see a new line item on their bill for sales tax, which will default to $0 and 0%. If a state declares nexus with ServiceMonster, your invoice will reflect your sales tax responsibility at your local rate.
Should we have done this a long time ago? Probably. Unfortunately, the tools required to make this a simple administration task, like knowing the tax rate in every jurisdiction we have a client, are relatively new. Should we have gone with a riskier ‘growth-at-all-costs’ attitude? I guess this is just one of those areas where I’m not a very good CEO. For me, the regulations under which we operate are non-negotiable. The laws, employees, and clients have always come before growth or profits. I know I’ve left money on the table for this idea, but unearned profit is often poison. That’s not how ServiceMonster does business. Our 20-year history with zero lawsuits, zero judgments, and zero audits allows me to sleep well at night, nexus or not. These changes ensure that we will continue to operate with the utmost integrity in every state.