Sales Tax for Custom Software Shops: Anrok or Avalara

Custom-built software delivered as part of a development engagement is generally analyzed as a service in most states: you are billing for the work of writing code, not selling a packaged product off a shelf. Once that same codebase becomes a licensed tool you resell to other clients, several states will treat that license fee as taxable tangible software, canned software, or a digital product, depending on how the state defines it.

Many shops never separate these two lines cleanly on an invoice, which makes it hard for any tax platform, or any accountant, to apply the right rule to the right dollar. Before comparing vendors, it is worth confirming your billing system can tag services revenue and license or product revenue separately.

If your product spinoff bills through Stripe Billing, Chargebee, or a similar subscription tool, Anrok reads those invoice events directly and applies SaaS-style taxability rules to the license or subscription fee, while leaving your services invoices out of that pipeline entirely. It tracks nexus as that product revenue grows in each state, which matters once a formerly small side product starts generating real recurring revenue on its own.

The cost-per-hour math also favors automation here: median pay for a staff accountant is $83,680 a year, rising past $109,810 at the 75th percentile¹, and manually reclassifying every invoice line by hand does not scale as the product line grows.

A software development firm with a larger finance stack, invoicing through NetSuite or a similar ERP, or one that also resells third-party licenses and hardware alongside its own build work, generally fits Avalara's broader tax-type coverage more comfortably. Avalara's exemption certificate handling is also useful if you resell licenses to reseller or distributor clients who claim resale exemptions on those purchases.

Where Avalara asks for more setup is in mapping your specific mix of services, custom licenses, and any hardware pass-through into its tax code categories correctly during onboarding, which takes real time from whoever owns the implementation.

Say a client engagement bills $40,000 for a three-month build and, once delivered, a $2,000 monthly license fee for continued use of a reporting module you built for them. The build fee is likely to sit outside sales tax in most states as a professional service. The license fee is the one worth watching for nexus and taxability, because it recurs and because several states treat ongoing software licenses as taxable regardless of how the underlying work was originally billed.

CAC payback also matters to this decision indirectly: teams stretching to shorten CAC payback on the product line rarely want a manual tax process slowing down how fast that product can bill new customers².

Ask both vendors, directly, how they distinguish services revenue from license or product revenue in your specific billing setup, since that split is the whole point for a firm like yours. Confirm whether your existing invoicing tool, whatever it is, has a supported integration, and get a straight answer on how historical nexus exposure from before you switch tools gets handled.

Also ask what happens when a single client relationship spans both lines, for example a client who pays a monthly retainer for ongoing engineering work and a separate license fee for a tool your team maintains for them. A platform that cannot keep those two charges apart on one account will misclassify one of them sooner or later, and untangling that after the fact costs more than getting the setup right at the start.

For a state-by-state read on whether a given engagement or license fee is taxable, involve a CPA or tax attorney who has worked with software firms specifically. See Avalara, Anrok, and TaxJar compared for a broader look before you pick one.

Use this short list when comparing vendors:

• Ask how the platform distinguishes services revenue from license or product revenue in your specific billing setup.
• Confirm it connects to your existing invoicing tool, whether that is Stripe Billing, Chargebee or an ERP such as NetSuite.
• Check that it can apply different treatment to separate line items on the same invoice, such as a build fee and a license fee.
• Make sure your own invoices separate services from product revenue, or at least tag line items clearly, so the right rule applies to each.