Compliance Decisions for Indian Startups in the US Market

The focus keyword, compliance decisions, is crucial for Indian founders aiming to scale in the U.S. market. While the American market presents vast opportunities, Indian startups must navigate a challenging landscape of tax and customs regulations. With over 13,000 U.S. sales and use tax jurisdictions, along with differing federal tariff rules from state sales tax obligations, the compliance scenario can easily become misconstrued. These gaps frequently arise during investor due diligence, as operational discipline and regulatory preparedness are evaluated closely.

To guide founders in approaching U.S. expansion with clarity, an exclusive dialogue was held with Dulles Krishnan, Vice President of Go-to-Market at Avalara – India and APAC.

Importance of Early Automation

Krishnan underscores that early automation is vital for establishing a scalable foundation. He clarifies the differences between the tax systems and highlights the need to monitor sales thresholds (Economic Nexus) and ensure accurate product classification (HS Codes) from the outset. He notes that by embedding compliance into daily operations, founders can minimise risks, adhere to governance standards, and concentrate on disciplined and sustainable growth.

Key Insights from Dulles Krishnan

Q1: What is Driving Indian Startups’ Entry into the U.S. Market?

Dulles Krishnan highlights that two main factors are propelling this trend: rising confidence among founders and a robust infrastructure. SaaS leaders view the U.S. as the largest and most advanced software market, while D2C brands find a developed e-commerce ecosystem that appreciates quality and transparency. The infrastructure is ready, with streamlined cross-border payments, dependable fulfilment systems, and digital selling platforms making it easier to acquire the first customer. However, the true challenge begins post-sale, as companies must meticulously handle tax, logistics, and pricing. Founders are learning that scaling involves not only customer acquisition but also ensuring sustainable profitability.

Q2: What Makes U.S. Tax Compliance Challenging for Indian Startups?

Dulles Krishnan explains that U.S. tax compliance is intricate due to the absence of a centralised tax system. Startups must navigate numerous jurisdictions, with each of the 50 states creating its own sales tax regulations, thresholds, and taxability criteria. Consequently, the same transactions might be treated differently based on the customer’s location.

Indian companies generally face tax obligations through two main routes, depending on their business model:

1. SaaS and Digital Services
   For SaaS firms, economic nexus drives liability. In most states, companies must register and start collecting sales tax once they reach $100,000 in annual sales within that state. This requirement can trigger purely from online transactions, even without a U.S. presence. Given that each state defines the taxability of digital services uniquely, monitoring classification and thresholds is critical.
2. Direct-to-Consumer (D2C) Exporters
   D2C exporters must adhere to two specific compliance obligations:
   • Federal Customs Duty: This applies when goods enter the U.S., relying on proper HS code classification and customs valuation.
   • State Sales Tax: This is applicable when those goods are sold to customers within different states, with rules varying by jurisdiction.

These federal and state systems operate separately, and first-time exporters often confuse one for the other.

Q3: What Common Mistakes Do Indian Startups Make When Selling to U.S. Customers?

Dulles Krishnan identifies three frequent mistakes made by startups:

1. Delay in registering for sales tax: Many founders assume they need to establish a U.S. entity before registering, but most states trigger this obligation based on sales thresholds, not corporate structure.
2. Misclassification of products or services: Incorrect HS codes can alter duty treatment and delay shipments. For SaaS companies, wrong classification of digital services can result in flawed tax collection, as taxability varies by state.
3. Overreliance on payment processors or marketplaces: While these platforms may calculate tax at checkout, they do not handle registration, filing, or remittance for sellers. Marketplace facilitator laws may require larger platforms to manage tax on marketplace transactions, but it’s still the seller’s duty to maintain accurate records and comply with filing regulations.

Q4: How Does Weak Compliance Planning Impact Pricing and Competitiveness?

Dulles Krishnan elaborates that inadequate compliance planning leads to unnecessary expenses and uncertainty. Missed filings, incorrect duty treatment, or late registrations can trigger penalties or disrupt cash flow, making it harder for founders to offer consistent pricing. U.S. consumers expect clarity regarding landed costs and tax documentation. Companies that provide precise estimates and maintain organised records quickly build trust and face fewer inquiries during procurement, onboarding, or partner negotiations. Properly managed compliance supports consistent pricing, reliable operations, and enhanced commercial credibility, reinforcing brand reputation as well as operational effectiveness.

Q5: How Can Small or Mid-Size Teams Manage Compliance Efficiently?

Dulles Krishnan suggests that automation presents a viable solution for emerging businesses with smaller operational frameworks. Contemporary software seamlessly integrates with billing and e-commerce systems to calculate tax or duty for each transaction, track state thresholds, and prepare filings instantaneously. This drastically decreases manual effort and reduces the chance of overlooked obligations. Furthermore, AI capabilities can analyse transaction patterns, identifying areas needing attention. This proactive approach provides founders with early insight into potential challenges rather than discovering them only after receiving notifications.

Q6: When Should Founders Start Planning for Compliance?

Dulles Krishnan advises that compliance planning should begin from the first invoice, as sales thresholds start to accumulate from there. Early registration and automated reporting offer visibility into exposure from the beginning. Key focus areas include:

• Visibility: Understand where sales occur and which states approach thresholds.
• Classification: Maintain accurate product and service data for effective duty and tax management.
• Integration: Link compliance systems with accounting and analytics platforms to ensure filings rely on consistent data.

Implementing discipline early helps prevent costly mistakes and indicates credibility to investors and partners.

Q7: How Does Compliance Influence Other Business Aspects Beyond Finance?

Dulles Krishnan explains that compliance information significantly impacts pricing, logistics, and sales strategies. Accurate calculations for tax and duties help establish pricing structures, determine warehouse locations, and shape contract conditions. When all departments work from the same data, forecasting becomes more accurate, and execution is more uniform. Treating compliance as a collective responsibility bolsters governance and operational unity throughout the organisation.

For exporters, AI technologies can project landed costs under changing duty regulations. In contrast, for SaaS companies, they can help forecast how growth across different states may affect nexus exposure. In both scenarios, compliance insights serve as actionable inputs for strategic decision-making rather than merely remedial solutions.

Q8: What is the Current Compliance Readiness Level Among Indian Startups?

Dulles Krishnan notes that readiness varies among Indian startups. Well-funded companies often prioritise compliance systems while scaling, whereas growth-stage teams might develop these functions only after achieving significant revenues. A positive trend is evident, as founders are increasingly recognising compliance as part of their strategy rather than a task to handle later. This understanding is further emphasised by heightened investor scrutiny during due diligence, which now routinely involves reviewing U.S. tax records, making accurate record-keeping indispensable for expediting investment and acquisition discussions.

His primary recommendation for founders is to view compliance as a driver for growth by establishing foundational structures early on:

• Determine Your Path: Clearly decide whether selling a digital service (SaaS) or a physical product (D2C), as each follows distinct compliance routes.
• Automate Early: For SaaS models, track customers diligently, observe state thresholds (economic nexus), register, and automate filings promptly.
• Classify Accurately: For export businesses, ensure precise product classification (HS Codes), calculate duties upfront, and incorporate those costs into pricing strategies.
• Build Discipline: Founders who create structured processes early protect profit margins, build trust, and position themselves as reliable long-term partners.

The U.S. market rewards businesses that balance flexibility with discipline.