What You Don’t Know Can Cost You

When I was in-house counsel, people would ask me what kept me up at night and my answer was, ‘not knowing what I don’t know.’ This was particularly true when I’d start a new job in an industry where I didn’t have deep experience, or taking a company into a country that I hadn’t before.

Ever hear of escheating, dealer protection, money transmission? Exactly.

And it’s not just areas of the law that are not on your radar. Companies are constantly caught by surprise by laws both new (CVAA/CVTA) and old (VPPA) that are not ancillary to the business, but apply directly to it. I remember reading about the CVAA - which requires accessibility compliance by communication tools (among other things) - when it was first passed into law and thinking, “my job will never get boring!” I brought the new law to my client, a B2B technology company that provided communication tools to its B2C customers. They quickly built the accessibility requirements into its offering and used it as a selling point because they were able to comply well before its competition. Accessibility isn't just important for those who need it, it's a topic of many, many lawsuits. We benefited from knowing the law; our competition lost business because they did not.

Ignorance is not bliss. Nor is it a defense. Missing these legal landmines can be costly and I am not just referring to the fines, although those can be quite high. Failing to take into account all areas that affect your business can result in product re-builds, tax audits, and lower valuations. You know that old adage, ‘a stitch in time saves nine’? Your engineers may have that in their minds as they are spending countless hours fixing a feature for the oh-so-sexy compliance requirements.

Tax provides many cautionary tales. Tax laws are incredibly complicated and they exist at every level – local, state, federal, international. Failing to comply with tax laws can be hugely expensive. Take for example two technology companies that have SaaS platforms, each based in New York selling its services in to customers in New York. Company A uses its technology to give its customers the ability to sell their products. Company A is paid based on the volume of products sold and not for access to its SaaS platform. Company B bases its sales on the number of users (or seats). Both use “license” language in their agreements. One even calls its agreement a EULA. New York’s taxing authority has the following logic:

SaaS = Software

Software = downloadable software

Downloadable software = tangible personal property

The sale of tangible personal property is taxable in New York

Neither company charged tax to its customers, nor made any sales tax filings in New York. Both have a problem if New York comes knocking. Even if Company A did not need to collect and remit sales tax, because of the license language and calling itself a SaaS provider, it has a years-long fight with New York. This means very expense (but well worth the $$!!) Tax Counsel and costly hours by the Finance and Legal teams. And when the CEO is told the potential outcome, the price she pays is sleepless nights. What about Company B? Good luck trying to collect sales tax from clients for the past 6 (or 10 or 20?!) years…. That expensive Tax Counsel also needs to negotiate down the fines, penalties and interest (not just the tax bill itself). The cost is likely in the multiple millions.

As a SaaS company, would you know that you were selling tangible personal property in New York? And you do not need to be a New York-based company for this to apply to you. Even if New York has not knocked on your door, when trying to sell your company the buyer’s tax lawyers will be combing through your dataroom and will insist on protection, perhaps in the form of a tax indemnity or holdback of a portion of the purchase price.

It should be noted that I am not a tax lawyer. The above is not legal advice. But these are more than cautionary tales.

Want to talk to someone who will help you learn what you may not yet know? Email me at Brooke@Brass.law.