Episode 658 | As a SaaS Founder, When Should You Care About Sales Tax?

Rob Walling:
Welcome back to another episode of Startups For the Rest of Us, I’m Rob Walling. Today I sit down with Geoff Roberts, co-founder of Outseta. He wrote a 4,400 word article on global sales tax remittance, and I joke with him in today’s conversation about how it’s one of the most boring topics, but it’s something that people should be aware of and that’s why I titled this episode As a SaaS Founder, when Should You Care about Sales Tax?
Because the answer is likely not on day one, but there does come a point when you need to start thinking about sales tax, not only within your own country but globally. And that’s what Geoff and I dig into today. He’s done a ton of research on this topic. We define merchant of record, we talk about when you might want to be your own versus using a third party. The pros and cons, and we hear a little bit about Geoff’s own story as a founder of Outseta.
Before we dive into that, MicroConf Mastermind matching starts in just a week or two. Our applications open on May 3rd, and we’ve had incredible success connecting nearly 1000 founders around the world over the last three years with approaching $200 million in combined ARR. We have founders in the idea stage all the way up to making millions low eight figures, literally $10 million a year.
So whatever stage you’re at, if you’ve ever wanted to be connected with a small group of other like-minded founders who are likely at your stage or maybe just a little ahead of you for support and guidance and accountability, head to microconf.com/masterminds to learn more and to get matched. Applications open May 3rd. They close on May 12th, and we send matches by May 17th.
We only do matches two, maybe three times a year. And every time we do it, we have someone a protest after the applications close and beg to get in. And unfortunately we can’t do that. So make sure if you want to be matched in a mastermind that you hit microconf/masterminds before May 12th. And with that, let’s dive into my conversation.
Geoff Roberts, welcome to the show.

Geoff Roberts :
Thanks for having me, Rob.

Rob Walling:
It’s great to have you on, man. I’m looking forward to hanging out next week or by the time this goes live, I think it’ll be last week at MicroConf US in Denver. But today we’re going to talk about one of the most boring topics that I can think of, but we’re going to make it interesting, right? I recorded it YouTube video a couple weeks ago about SOC 2 compliance, and I started it by saying, yeah, you think this is going to be boring, but it’s really important, but so is global sales tax compliance and remittance.
You wrote this article on your company blog, so you’re a startup founder at Outseta.com and it’s all in one membership software, but you’ve obviously had to deal with some global sales tax compliance and remittance because you wrote this article, subheading, “what I’ve learned over the last 18 months about when to use a third party merchant of record versus when to act on your own”.
So first question is, hey, why is this so important? Why should people listen to this episode and learn about it?

Geoff Roberts :
Yeah, I think the reason it’s important is an obligation for any SaaS founder to figure out what they need to do around global sales tax compliance and remittance. And more importantly, nobody understands it. It is completely confusing. Everybody that I’ve spoken to, even people that think they understand this subject well, don’t understand it a hundred percent, myself included. And it really came to the forefront for us because we are a SaaS company ourselves. We need to figure this out as a business ourselves, but we are a billing system.
We do process payments and we need to productize a solution to this problem for our customers. And we spent the better part of 18 months evaluating every option on the market from using a third party merchant of record to all of the different tax software products that are out there. And during this 18 month period, we had customers kind of asking us for solutions and asking us for solutions and asking us for solutions. And I felt guilty. I was like, we’re a billing system. We need to have a good answer to this problem.
But the conclusion that I’ve come to after spending so much time thinking about this is there really isn’t a good solution to this problem today. So it’s kind of a pick your poison scenario and that’s what the article I wrote is all about.

Rob Walling:
And if I’m a startup founder running a bootstrap business, doing 10 grand a month, 20 grand a month, can I just ignore all of this? Do I need to pay attention? Or I guess what I’m asking is does it only hit you at scale? What is the downside and when do you think it becomes important?

Geoff Roberts :
Yeah, so I would say first of all, the legal advice that anyone would give you is there are different revenue thresholds in each country after which you need to worry about this. Some of them are when you process your very first payment in a given country, others are hundreds of thousands of dollars of payments processed.
So the technical legal answer is, it kind of depends. That being said, I think that you really don’t need to worry about this particularly on your way to 10K in MRR. I think it’s much like all other aspects of building a startup. You need to create good problems. And I would turn my attention to this personally, probably somewhere between 500K and a million dollars a year in revenue. I think that’s a point where you will be processing enough payments that you’ll have sort of a significant tax obligation in a number of jurisdictions that warrant’s actually figuring this all out. Before that, I think it’s honestly not something you need to worry about too much.

Rob Walling:
And I should caveat this whole conversation with, neither you or I are lawyers, we’re not accountants, we’re not legal nor tax advice. These are just opinions of two people on the internet who happen to have read some stuff, right? I mean, this is it, but no, I agree with you. So when I was growing my startups, it was always, it’s like I don’t need insurance early on, I didn’t have an LLC for a long time because I was a sole proprietor until I hit about 70K, 80K a year. There were just certain moments where it’s like, of course it’s risk tolerance. Of course if you talk to the most strict lawyer, then they will say, do all this stuff up front. And it’s like, well, that’s 20 grand in fees and I don’t have a business yet. So it’s like you have to take this with a grain of salt.
In terms of this post or this essay, which is a 19 minute read you have at the top, which is a warning like, slow down, if you really want to do it, do it. But otherwise. It’s global sales tax. So is this about country to country stuff or does this apply, let’s say I’m in the US there are 50 states, different counties have different sales tax, all that. Do you address any of that in this post?

Geoff Roberts :
Yeah, it’s all discussed in this post. Basically at this point you probably have a tax obligation in any country where you have a customer at least to some extent including your own country. But the part that is really crazy about this topic to me is these are not taxes that your business owes. These are taxes that your customers owe and it is you, the small business owner who is supposed to keep track of all this stuff and remit taxes on behalf of all of those customers.
The whole system is kind of crazy if you ask me. And one of the realizations that I came to in writing this post is just the frequency in which the actual tax rates and tax laws change even within your own country. So within the United States in 2021, there were 600 plus different tax rate changes that went into effect that year. And to get just keep track of that within your own country, let alone every country in the world, every municipality in the world is kind of ridiculous. And even the companies that do this full-time, like that’s what their products are based around the idea that you would ever be fully in compliant at any point in time is sort of a ridiculous notion in and of itself.

Rob Walling:
Obviously with Outseta, you are a membership website platform and so I could go set up a membership website for MicroConf for example, and then I could charge folks in MicroConf to pay a membership fee. In essence, money would be flowing through Outseta to me, and that’s when this becomes more complicated. Is that right? Because I’m imagining, let’s say I had a email service provider like Drip or MailChimp, my customers are not charging their customers for anything, they’re just paying me money. How is that maybe more or less complex than the situation you’re dealing with?

Geoff Roberts :
I think the only thing that is more complex is we have to pay taxes ourselves as a company, but we provide tools to our customers to do the same thing. That’s the only additional level of complexity here. But within our customer base, we have hundreds of companies that are looking to us and saying, what is this global sales tax remittance stuff? Do I need to worry about this? When do I need to worry about this? Is Outseta a merchant of record? Can it be a merchant of record? Do you integrate with other tax software products? So we’ve just been barraged with these questions and we’re trying to provide some clear cut advice to our customers so they can sort of wade through the scenario that they find themselves in and have a workable solution.

Rob Walling:
So that begs the question, can you define what a merchant of record is?

Geoff Roberts :
Yes, A merchant of record is who you are actually interacting with. If you’re processing credit and debit card payments, it’s the person or the organizations that’s going to show up on your bank statement. It’s the person that is sort of liable for those transactions.
So most SaaS companies today, ourselves included, will use Stripe for payment processing. They set up their own what’s called merchant account with Stripe, and they’re basically responsible for all of the transactions processed through Stripe on behalf of their business. If that’s the case, that means you do need to be applying tax to your invoices and remitting tax and all these different jurisdictions where you do business.
But a third party merchant of record is a newer option that’s become quite popular. The popular merchant of record products out there today are Paddle, Lemon Squeezy Gumroad, those sorts of customers where essentially they create one master merchant of record account for all of their customers and they’re actually processing payments on behalf of your business.
Your customers aren’t interacting with your business, in that case, they’re interacting with the merchant of record and the merchant of record then sort of issues a payout to your company after they’ve remitted all the taxes that are required.
So there’s sort of this perception that if you use a third party merchant of record, your problems are just solved. And to some extent that is true. You don’t need to think to the same level about global sales, tax remittance and compliance because the merchant of record is doing it for you. But there are downsides ranging from higher payment processing fees to platform risk that you need to consider. So I don’t think one is a clear cut better option, frankly.

Rob Walling:
Got it. And at Outseta, are you a merchant of record?

Geoff Roberts :
We are not a merchant of record. Part of this post was me just kind of being honest with our customer base saying, we’ve been thinking about this for 18 months, we still don’t have a great solution to this problem. And I think the article, I hope I sort of bring some credibility to the discussion because we’re not trying to sell you anything. We don’t have a great solution at this point in time.
But where we’ve landed as a company is we want to offer both options. I think most SaaS businesses will probably opt towards continuing to use Stripe. And I know for a fact since publishing this article, there is a huge influx of remittance related products and services that are being built right now that aim to make this whole process easier for companies that do use Stripe.
But we also sell to a lot of more creator focused businesses where I think a merchant of record maybe does make more sense for them and we are looking for a viable partner to offer a merchant of record solution ourselves too.

Rob Walling:
I imagine it’s pretty complicated to be a merchant of record.

Geoff Roberts :
It is. It’s a lot of administrative work. I mean, you look at the companies that have done this, Paddle’s raised 300 million in funding largely because they need to figure out how to do all this on behalf of their customer base. And I think it’s even telling that Stripe has not prioritized their own merchant of record solution, at least at this point. I suspect they will at some point, but there’s just a lot that goes into it, frankly. So it would be really hard for a small business like Outseta to become a merchant of record ourselves.

Rob Walling:
Yeah, I would imagine. Is Outseta bootstrapped or if you raised funding?

Geoff Roberts :
We are.

Rob Walling:
Okay. Yeah, that would make it especially difficult. I remember back in the day, Gumroad raised money, they raised like 7 million bucks in whatever the year was, 2013, 2014. And their head of growth, Ryan Dell came and spoke at MicroConf and I asked him why didn’t Gumroad bootstrap was number one, and then why did they raise so much money? Because it just seemed like a big amount for what they were doing. The software wasn’t that complicated, I just didn’t get it and I’m not anti funding, but raising half a million dollars makes sold sense, but raising 7 million was like, what is happening? And he said one of the reasons was that they needed to become their own. The way he said it was credit card processor, payment processor. But I think it really was merchant a record.
And in order to do that, you need to work directly with banks in a fashion where they need to have confidence in you, in your company and they need to trust you, the company. And that was one signal they could say, well, we raised this much money from these top tier VCs. I think you’d have a pretty challenging time. Maybe today it’s a little easier, but I think becoming a merchant of record when you’re just a little bootstrap company no one’s heard of I think could be challenging.

Geoff Roberts :
Absolutely. Yeah. I think the path for us would be an integration with a Paddle, Lemon Squeezy, et cetera. Those platforms charge pretty high payment processing fees for being a merchant of record. And that’s part of our revenue model too. So everything we’ve looked at so far would just result in, at least in my opinion, payment processing fees that are prohibitively high. And the other concern for a company like us is we’ve built all of our own UI around signup forms and whatnot. If we go with one of these third party merchant of records, you almost definitely have to use their own UI on the front end.
So we’d have two different implementation paths for our product, one focused on Stripe, one focused on whatever merchant of record solution we integrate with. Long story short, we haven’t found an option that we think is really viable and a good solution for our customers yet.

Rob Walling:
So you wrote this post, which I’m doing a word count on it as we speak. It’s a lot. It’s what, more than 4,000 words. It’s like a book chapter.

Geoff Roberts :
It is.

Rob Walling:
It must take me a lot of time. Why did you do it? Other than just to be a nice person and help the internet and helps SaaS companies was there other motivation?

Geoff Roberts :
I wouldn’t say there was any particular motivation other than trying to bring sense to this topic for our customers. I mean, our support inbox is filled with people asking questions, do I need to worry about this? Do I not need to worry about this? And frankly, we wanted our own customers to know we’ve been looking into this, we’ve been exploring it from all angles.
My own perspectives have changed on this topic. When I really all of 2022, I was talking to our product team saying, I think we need to be a merchant of record. We sell to early stage companies. Let’s just take this topic off their plate completely. But the further I went down this path, the more founders I spoke to, the more I actually started kind of backtracking on that perspective and I just wanted to share everything I’d learned on the topic and also communicate that. I think ideally for a payment processing company like us, offering both options and giving your customers that level of optionality is the best solution.

Rob Walling:
And something you say in the article is if you’re a SaaS company that’s just starting out, I would act as my own merchant or record. In fact, I wouldn’t worry about global sales tax remittance at all yet. Which I think ties into what we said earlier of, hey, if you’re trying to get to 10K, 20K, quit the job. Again, not advice because you should be a hundred percent compliant with all laws at all time, but it’s like realistically, that’s just how it works.
But what’s funny is, you have this really nice diagram and it says the question of merchant record using a merchant record, pros and cons, the only pro is convenience. That’s it. There’s one, it’s because it’s more convenient. The cons are slower, approval process, customer confusion. You want to define that on why customers could be confused.

Geoff Roberts :
So customer confusion, I think it’s one of those things you’re going to see a lot of initially with new customers if you are using a third party merchant of record. So if a customer looks at their bank statement and you are buying a product from a company that uses a third party merchant of record, they’re not going to see the company’s name on their bank statement. They’re going to see paddle or they’re going to see Gumroad or they’re going to see Lemon Squeezy, the name of the third party merchant of record. And a lot of times that causes customers to kind of freak out and say, why am I getting charged by this business I have no relationship with. All these companies have addressed this in various ways. It’s something I think once you receive an invoice and are confused, you probably figure it out and it’s not that big of a deal, but it is certainly something to consider.

Rob Walling:
That makes sense. And then the other cons are significantly higher platform risk, which is pretty obvious. Imagine if your merchant a record went under that would be devastating. And then high payment processing fees, then you have a nice headline, I think kind of a nice summary of it. You’re like you say, if you’re just starting out, I wouldn’t worry about it yet. If I was a creator that sells one time fee digital products, I would recommend using a merchant or record. I can live with a extra 5% fee once, but I don’t want to live with it on an ongoing basis.
And then you say if I’m a SaaS company doing over a million a year, I would act as my own merchant record, which makes a lot of sense to me because again, it’s SaaS and so you’re getting all that recurring revenue and figuring it out was probably worth your time. Then should you deal with the global sales tax maintenance? Because it sounds like it’s a big fricking fiasco to figure out. I’ve heard of Stripe sales Tax or Stripe Tax or something, is that the kind of thing you would do?

Geoff Roberts :
Yeah, what I personally think is the best option and what we’re going to do in the context of our own business and also probably the first thing we’ll productize for our customers is I do think Stripe Tax has solved this better than anybody else when it comes to tracking the actual tax that you owe. And Stripe Tax will also tell you specifically what jurisdictions you need to remit taxes in.
So if there’s a particular sales threshold in a given country and you’re over that threshold, Stripe Tax notifies you. It says you’ve sold 50K worth of product in this jurisdiction, you need to remit taxes there. So I think the first step for any company is just going to be turning on Stripe tax. That’s what I’d recommend at least. So you at least have insight into where you owe taxes and you are starting to collect taxes as well.
The problem then becomes remittance, which is actually filing your taxes with all of these different countries, different geographies, et cetera. Stripe does have some partners that they recommend. They have Taxjar, their partner in the US. There’s a couple options in Asia, a couple options in Europe that they recommend, but for me it’s, turn on Stripe tax, start collecting tax, and then I would start to gradually remit taxes in any jurisdiction where I’m really processing significant volume, I would probably start in my home country. For most companies, I think you’ll probably go to Europe next, that that’s kind of a guess.
But I would sort of do it incrementally and over time, if you have a 50 million a year business, yeah, you’re probably going to be remitting taxes all over the place, but the cost of remitting these taxes doesn’t scale up dramatically and that’s why I’m uncomfortable saying I’m going to pay 7% or 10% or whatever it might be and perpetuity on every single recurring transaction. I would rather optimize for the lower payment processing fees and then just remit taxes as it sort of makes sensible sense to do so.

Rob Walling:
I can imagine someone doing a million or 2 million in ARR or even 5 million, it’s just still such a small business compared to the world and they’re domiciled in California, they’re California LLC or whatever, or Oregon llc, and they have some customers in Europe and it shows by their calculations that they owe $5,000 or $10,000 in taxes to England or the UK or whatever.
I can imagine someone thinking, I’m not going to pay these, what are they going to do come after me? But is that a sensible way to think about it or is it if you go over there, they scan your passport and then they’re like, haha, we got you. How does a European government come and get an American small business?

Geoff Roberts :
Yeah, so I would say one of my other learnings as I’ve explored this topic is I was not able to find a single person who had a horror story about a foreign government coming after them for some sort of sales tax that they did not remit. Now does that mean that you should not remit those taxes? No, I’m not advocating for that whatsoever. I think you probably should try to do the right thing, but I think from a sort of risk assessment standpoint, part of the reason small businesses like us are being asked to collect these taxes in the first place is these governments haven’t figured out how to do it on their own in any sort of scalable fashion. I don’t think there’s any great way that this is consistently sort of enforced.
So I’m not saying don’t do it. I’m saying use your own common sense when you think that number is large enough that it makes sense to be remitting tax in these jurisdictions permanently start to do so. Before that, I think your actual risk is extremely low.

Rob Walling:
Yeah, I can imagine the risk may increase someday. Don’t know. Some countries may get their act together and do it. The other thing is, I haven’t heard this either, but I could imagine if you went to raise a funding ground or sell a company that depending on who was investing or who was acquiring and how much money was involved, there could potentially be a liability there. And my guess is it wouldn’t scuttle an acquisition, but it might be a hold back type situation.
When you sell a company for $10 million, usually… I forget what the number is, if it’s 10% or 15% of that amount is held back for 18 months, two years just in case something happens. And I can imagine that might be something people would think about.

Geoff Roberts :
Yeah, it’s a concern that I hear all the time. Probably the number one case for a merchant of record that I’ve heard, at least from people that are kind of freaked out about this topic is what if there is an acquisition of my business someday and I haven’t done this, is that going to kill the deal? And I think it could certainly happen.
I will say in the context of writing this article, I talked to a founder who sold a business for between $500 million and a billion dollars, so a big acquisition to a publicly traded company. They just disclosed during the acquisition that they had never paid global sales tax and they didn’t know how the acquiring party was going to react to that. And they were sort of surprised. The acquiring party almost laughed it off and said to them, we would’ve been really surprised if you had paid global sales tax.
And maybe that’s going to change a little bit over the years to your point, but I think that’s very much the norm, and if someone is trying to kill a deal over this, they’re probably not like that serious about acquiring your company anyways.

Rob Walling:
It’s not where the market is today. Yeah. Well cool. If folks want to check out the post, obviously we’ll link it up in the show notes so they can go to Outseta.com/blog to see it. Before we wrap up though, I want to hear a little more about Outseta. So you’re bootstrapped, how long you’ve been in business, how many founders, how big’s the team, some idea of scale.

Geoff Roberts :
First of all, yes. You’re a hundred percent correct. It is membership software. We use membership software as a little bit of a broad catch all because our target market has switched a little bit, but we set out to build an all-in-one tech stack for SaaS founders building SaaS companies. We sort of built Stripe billing before Stripe billing was a thing. And then we said, you know what? All these SaaS founders need authentication and CRM and transactional emails. And the basic premise of the company is it’s just all the kind of table stakes functionality that you need to launch a SAS business.
And we also sell to less technical founders building membership sites that need comparable functionality today. But we’ve been at it for six years now. We’re a hundred percent bootstrapped. There are three founders and six people on the team at this point.

Rob Walling:
Wow, good for you guys. Did you get any type of Covid bump when that happened and how’s it been going since then in terms of growth and traction?

Geoff Roberts :
Yeah, it’s been interesting. We actually did get a little bit of a Covid bump. As everybody started getting laid off, everybody started launching their own companies and Outseta sort of a inexpensive way to do that. We really started to grow in earnest kind of through Covid and I would say since then, just in the last few months in terms of new customer signups, we’ve definitely felt the economy a little bit.
We’re still trending up into the right, but our growth in terms of new customers has slowed a little bit the last few months. But what we’ve seen is our real revenue model is we take a 1% fee on successfully processed transactions. So as our customers grow, we grow. And we’ve been growing pretty aggressively over the last year really based on the growth of our customers, more so than new customer signups, which is pretty cool.

Rob Walling:
Yeah, that’s interesting because when I went to the homepage the first time, it says membership software and I was thinking, oh, this is for membership websites, the information marketer, the knowledge marketer who has a personal brand selling, but then your H2 talks about monetize your website, your SaaS product or your online community. So there’s more to it. And you have billing, you have CRM, you have email automations, like you said, you have help desk, so you have some type of support and authentication. So there’s quite a bit here.

Geoff Roberts :
Yeah, we have a interesting marketing challenge in the sense that our customer base is roughly split between very technical founders building SaaS companies and no coders building membership websites. They all need CRM, they all need billing, they all need authentication. They’re sort of controlling access to their feature sets or their content based on your subscription. So they’re actually very similar, but how we speak to them and even the implementation process is quite different between those two target markets.
But for SaaS founders, the thing that tends to get them interestingly enough is not that your billing system and your email tools and your CRM is integrated, they’ve got the technical skill set to integrate best in class point solutions if they want to. It’s more all these little workflows that you typically need to write custom code on top of Stripe to support.
So things like if a subscription payment fails, do you want to lock the user out of their account and prompt them to update their payment information on login? Those are little workflows that we’ve built into Outseta, so you don’t need to code the stuff yourself. And because we offer both authentication and billing, it all just kind of works out of the box for you.

Rob Walling:
You have a neat little Twitter thread on Outseta.com/billing and it’s Derek Reimer asking SaaS developers, what was your last experience like integrating Stripe billing with your app and then Ruben Gomez who comes on this show all the time. Annoying, sucks. We did this twice, two different apps in the last few months, standard SaaS tier and monthly yearly billing options for all the hype about how easy it was. It took longer than it should have, and some parts were confusing.
Then Ben Orenstein, friend of the pod chimed in, I’d guess we’ve invested more than a hundred hours and we’re definitely not done. So it is interesting, like Stripe innovated, right? I mean before Stripe I used PayPal web payments pro and fricking authorized.net and I hated both of them. And so Stripe just did an amazing job there and then they built Stripe billing and they built all this stuff, but it’s still not there. And it sounds like you’re trying to build another layer on top of that.

Geoff Roberts :
Yeah, there’s two ways that people have described what we offer that I think are generally helpful. The first one is people will express a lot of frustration with Stripe because Stripe hasn’t sort of built this end-to-end solution for a SaaS business. But frankly, Stripe is a payments company and they have a lot of focus outside of SaaS. So a lot of people will say Outseta is sort of the tech stack Stripe would build if Stripe just completely focused on SaaS.
The other parallel we hear a lot is you are sort of Shopify for SaaS businesses. It’s an easy way to get up and running. It gives you all the core tools that you need. You go on to build a $50 million business, you’re probably going to want to integrate best in class tools and build sort of the picture perfect tech stack, but we’re more than enough to get you started and really how we think about ourselves and from a design perspective, what we always keep in the back of our minds is we want to take SaaS companies from zero to somewhere between $5 million and $10 million a year in revenue. We think we can support that journey really, really well. And if you get beyond that point, you’ll sort of outgrow Outseta.

Rob Walling:
Very nice, sir. The folks want to keep up with you. You are Geoff T. Roberts on Twitter. It’s G-E-O-F-F T Roberts as well as Outseta.com. And I wanted to thank you for being such like an active participant in MicroConf Connect. I actually was telling you before this, I hadn’t read your post about global sales tax remittance, but someone in MicroConf Connect pulled it to my attention. They said this would be a great topic to hear on the podcast. And so thanks for writing the piece, essentially giving back to the community and for being such a contributor to connect.

Geoff Roberts :
Yeah, thanks for having me today and looking forward to seeing everybody in that community next week in Denver.

Rob Walling:
Amazing. All right, sir. Thanks.

Geoff Roberts :
Take care.

Rob Walling:
Thanks again to Geoff for joining me today on the show. Can obviously read the article linked up in the show notes. I look forward to connecting with you on Twitter. I’m @robwalling. Thanks for listening this week and every week. And this is Rob Walling signing off from episode 658.