In my previous post I introduced the concept of “nexus” and touched on the U.S. Supreme Court case South Dakota v. Wayfair – a ruling which is now triggering new tax collection requirements for many businesses.
The big question is: how will it impact yours?
DETERMINING NEXUS EXPOSURE
The first step is determining nexus. You’ll need to look at the guidelines being used by your state, but some of the obvious triggers for nexus will be:
- Having a brick and mortar location from which you sell
- Traveling salespeople
- Agents or distributors
- Trade show attendance
- Warehouses or inventory in warehouses
- Affiliate or drop-shipping relationships
- Employees living or working in a state
- Performing Installations or repairs
- And now economic presence with remote sales (as low as $100K+ or more than 200 individual sales)*
* Note that all state thresholds will vary. The Wayfair decision established that states cannot set their nexus limits for remote sellers under these thresholds.
If one or more of these apply to your business, you likely have nexus in a state and will be required to collect sales taxes on online purchases for goods or services delivered in those states.
At a minimum, you now need to collect internet sales tax on goods you’re selling in the state you’re physically based. And for most businesses, that won’t be the only state you need to collect for. As you can tell, this could get very tricky and complicated for any business rather quickly. Please work with your local tax professional or sales tax specialist if you need help determining your exposure. We can also help talk about your potential nexus triggering activities in a Financial Clarity Session.
Once you’ve determined nexus in any given state, you need to be able to collect and remit sales tax for sales within those states. And that means registering with the state (or states) in which you have nexus and complying with the state guidelines.
A FEW EXAMPLES OF ECONOMIC NEXUS
Let’s say you sell T-shirts online, and you make 4,350 separate shirt orders online during the year. Chances are, you have sold shirts all over the country. You ran a report out of your sales marketplace system (i.e. Shopify), and discovered that you sold 315 orders to customers in North Carolina, (a state that you don’t have any physical presence in). You’ve just created nexus by having 200 or more separate sales transactions – based on the current rules for the state. Since you have triggered “economic nexus” in North Carolina, you are responsible for being compliance with the state’s rules and collecting and remitting sales tax for customers in North Carolina going forward (effective dates vary). In this case, dollar value of the sales is not a factor because they reached the transaction number limit for the state’s rules.
Maybe your business sells truck engines – big, expensive engines that run $50K each and you sell about 100 individual engines across the country each year. You audit your prior year sales and discover that you sold 4 of these engines to customers in Indiana over the past year. You have no sales people or other physical presence in Indiana, but you’ve just created “economic nexus”, by triggering the current dollar threshold of $100k in sales. The number of transactions is not a factor to consider because you sold $200k worth of goods in the state, which exceeds Indiana’s current threshold.
Since we referenced the Sovos nexus table above, we’ve created an explanatory video to walk you through the chart and how to apply it:
PREPARATION AND COMPLIANCE
First, determine nexus for your business. Use the list above as a starting point for the discussion.
Once you’ve confirmed nexus there will be a series of activities you’ll need to undertake. These include, but are not limited to:
1. Finding a professional who understands nexus and its implications. State sales tax codes are complex, and no two are exactly alike. This is a complicated issue, and non-compliance could ultimately prove extremely costly. Leverage outside experts to conduct a thorough study of your activities, help determine nexus, and assist you in complying with the new laws. A professional can help with these key questions:
– Who should register
– Where to register
– What to tax
– Where it should be taxed
– Where to file
– When to file
– What to report on your tax returns
– Registering with the appropriate jurisdiction(s).
2. Setting up your e-commerce shopping cart with a software that can associate the correct tax rate to each customer based on your sales tax collection requirements.
3. Collecting sales tax. Note: DO NOT start collecting sales taxes prior to be being registered in the state you’re collecting for. It is illegal, and you could incur substantial penalties.
4. Reporting and paying your sales tax. Be aware different states may have different reporting and payment deadlines. Filing will be dictated to you by the taxing agency and will be required monthly, quarterly, or annually. Automation of payments of reporting and paying taxes can be done. We will be covering software tools in the upcoming posts.
5. Determining how you want to handle past non-compliance. If you have not been collecting sales tax in a state when you had the legal obligation to, you have two options: 1) voluntary disclosure to the jurisdiction involved, or 2) don’t disclose, and hope you don’t get caught or audited (and only collect sales tax now that you are aware). We always recommend that our clients get ahead of any issues with voluntary disclosure as it is more transparent and avoids penalties and fines later down the road in an audit.
In my next post I’ll focus on software solutions to assist in compliance with Wayfair. You won’t want to miss it!
Disclaimer: This blog post should not be misconstrued for tax advice. Discuss your current business needs with a tax professional. Also check the current tax requirements regularly as states are passing new legislation on this topic every month. There are also a few bills in the Federal government that, if passed, could affect the accuracy of this information.