This blog was last updated on January 8, 2026

Why Financial Institutions Overpay Sales & Use Tax and How to Stop It

$750,000. That’s how much one mid-size U.S. bank recovered in a single quarter—money they’d been overpaying in use tax for years without realizing it.

This wasn’t a struggling institution with a skeleton crew managing compliance. They had competent tax professionals. Established processes. They believed they were compliant. They were compliant. They were just wrong.

And if you’re leading finance, tax, or operations at a bank, credit union, lender, or fintech, there’s a good chance the same thing is happening to you right now.

The Tax Compliance Paradox: Why Gaps Persist

Financial services institutions are built on precision. Every basis point matters. Every dollar is tracked, audited, and reconciled. Risk management isn’t a function; it’s the foundation of everything you do.

And yet, when it comes to sales and use tax compliance, many of the most sophisticated financial institutions in America are operating blind.

Consider the math: the average mid-size financial institution processes over 10,000 procurement transactions per month. If just 3% involve incorrect tax treatment, that represents 300+ potential audit triggers every single month. Over a year, that’s 3,600 opportunities for errors to compound, errors that auditors are trained to find.

The annual U.S. tax compliance burden exceeds $546 billion. With 12,000+ tax jurisdictions and 25 states now taxing SaaS products, the complexity is exploding.

Unique Tax Compliance Challenges for Financial Services

Your organization isn’t just “a company with lots of transactions.” The nature of how financial services institutions operate creates a distinct tax compliance profile that standard solutions often fail to address.

Five Complexity Multipliers Unique to FinServ

Massive procurement ecosystems: Banks, lenders, and fintechs purchase from thousands of vendors across every category — technology services, data subscriptions, professional consulting, equipment, facilities management. Each category has different taxability rules that vary by state.

Decentralized purchasing: Unlike manufacturing where procurement flows through central purchasing, financial services organizations have purchases initiated from branches, trading floors, operations centers, and remote teams. Consistent tax treatment across all entry points is nearly impossible without automation.

Multi-entity structures: Holding companies, bank subsidiaries, broker-dealer entities, insurance affiliates – financial services groups often operate through complex legal entity structures spanning multiple states. Each entity may have different nexus obligations and exemption statuses.

Technology intensity: No industry has embraced SaaS and cloud services more aggressively than financial services. From core banking systems to trading platforms to customer-facing apps, your technology stack is vast and increasingly subject to sales tax in ways it wasn’t five years ago.

Both buyer AND seller: Here’s what truly sets financial services apart: you’re not just a buyer managing use tax exposure. You’re increasingly a seller of taxable digital services. Credit monitoring tools, financial planning dashboards, loan origination platforms – these SaaS products may trigger sales tax collection obligations you’ve never considered.

The SaaS Taxation Time Bomb

If there’s a single emerging risk keeping financial services tax directors up at night, it’s this: SaaS taxation is exploding in complexity, and most organizations are behind.

Twenty-five states now tax SaaS in some form. Seven additional states tax SaaS with download components. Just in 2024, California expanded sales tax to cover certain digital services including data extraction and analytics that are core to modern financial operations. Vermont began taxing prewritten software delivered remotely.

The same credit monitoring SaaS product might be fully taxable in Texas, partially taxable in Connecticut (6.35% for personal use, 1% for business), completely exempt in Florida, and subject to entirely different rules in Washington. Your vendor doesn’t know your business-use status and probably isn’t getting it right.

Now flip the script. If you offer any digital product to customers (and in 2025, almost every financial institution does) you may be triggering sales tax collection obligations without knowing it. Credit monitoring subscriptions, personal finance apps, loan prequalification tools, client portfolio dashboards, fraud alert services, white-labeled fintech platforms: all potentially taxable.

Under economic nexus rules established after South Dakota v. Wayfair, you can trigger collection obligations in states where you have no physical presence just by selling to enough customers there. For a bank with customers in all 50 states, or a fintech serving a nationwide user base, crossing these thresholds is nearly inevitable.

Use Tax: The Silent Audit Trigger

If SaaS taxation is the emerging threat, use tax is the chronic condition that never quite gets treated.

The concept is deceptively simple: when you buy something and the vendor doesn’t charge you sales tax, you owe “use tax” to your state at the same rate. It’s a self-assessed obligation in every state with a sales tax. In practice, it’s anything but simple.

Consider what happens with every purchase: Vendor invoices you. Invoice may or may not include sales tax. If tax is charged, was it the right amount? If not charged, do you owe use tax? At what rate and to which jurisdiction? How do you accrue and remit correctly? At each step, there’s room for error. Multiply this across thousands of transactions per month, and errors become statistically inevitable.

The Four Failure Modes

Vendor trust: You assume if the vendor charged tax, they got it right. They often don’t. Vendors may not know your exemption status, your ship-to location rules, or the current rate in your jurisdiction.

Exemption confusion: Financial services organizations often qualify for exemptions on certain purchases, but claiming exemptions requires documentation that vendors accept. Without centralized certificate management, exemptions go unclaimed or get challenged in audits.

Blanket accruals: Some organizations simply accrue use tax on everything where no tax was charged, a “better safe than sorry” approach. This leads to massive overpayment on exempt purchases and services.

Inconsistent application: Without automated rules, similar transactions get treated differently depending on who processes them, what time of month it is, and how busy the team is. Inconsistency is an auditor’s dream.

The Real Cost of a Tax Audit for Financial Institutions

State auditors targeting use tax compliance in financial services typically focus on out-of-state vendor purchases, technology and SaaS purchases with unclear taxability, professional services, fixed asset purchases, intercompany transactions, and purchases from non-traditional vendors like Amazon Business.

Beyond the actual tax owed, assessments typically include interest (8-12% annually from original due date), late payment penalties (5-25% of tax owed), negligence penalties for systematic failures, and fraud penalties up to 50%+ in cases of willful noncompliance.

An audit covering four years that finds $200,000 in underpaid tax can easily result in $350,000+ in total assessment after interest and penalties. And that’s for one state. Multi-state audits multiply quickly.

The ROI of Getting This Right with Tax Automation

Financial institutions using automated use tax validation typically see a 65% reduction in monthly tax processing time, $500K to $1M+ in recovered over-accruals annually, 98%+ filing accuracy across all entities, and zero audit penalties post-implementation.

Here’s what that looks like for a mid-size bank: Starting with manual processes and three FTEs on tax compliance with periodic audit assessments, automation delivers approximately 800 hours per year saved (roughly $80,000 in labor value), first-year over-accrual recovery of $750,000, estimated avoided penalties of $50,000 per year, and filing efficiency gains of $30,000 per year in reduced external prep costs.

First-year ROI: greater than 400% return on technology investment.

The Perspective Shift

Tax compliance, done right, isn’t just a cost to minimize. It’s a competitive advantage to leverage.

When your competitors are still processing tax manually, eating audit assessments, and missing recovery opportunities while you’ve automated the process, eliminated exposure, and redirected your tax team toward strategic work, that’s a meaningful edge.

The question isn’t whether your organization has hidden tax exposure. The question is how much and whether you’ll find it before an auditor does.

Your Next Move

Assess your current exposure. Quantify what manual processes, audit risk, and missed recoveries are actually costing you. Build the business case, frame automation as an investment with measurable ROI, not just a compliance expense.

And engage a partner built for financial services, not generic tax tools adapted for your industry.

Learn more about purpose-built sales and use tax solutions for financial services.