What To Do After You Discover You Have Sales Tax Nexus

In working with clients and performing nexus reviews, I often discover a client has sales tax nexus in a particular state where they didn’t realize they had nexus.  Their next question is almost invariably, what do I do now.  As with most things sales and use tax related “it depends” is my typical response.  A lot of small and mid-sized business owners and executives believe they need to immediately register.  Let’s not jump to that conclusion.

Here’s my talk track…just because you have sales tax nexus does NOT mean you need to register.  The next step after determining you have nexus is to review the taxability of your products and services.  If what you’re doing is non-taxable, then you have no worries.  In this situation, I would typically recommend not registering at all.  (Unless the state is a gross receipts based state or has some other compelling reason to register.)  Now, if what you’re doing is taxable, then we need to look at the amount of unremitted tax liability.  Quantifying this prior period exposure will help us recommend the appropriate go-forward plan.

A well thought out go-forward plan could consist of registering and collecting and filing prospectively.  In this case, you would not report any historical liabilities.  This could be beneficial if you have limited exposure and are looking to mitigate your exposure into the future.  You may also choose to register and collect and file prospectively (ignoring historical liabilities) if your nexus is more gray but you still want to mitigate risk into the future.  If the liability is great enough, and the nexus answer is very clear cut, then a VDA or amnesty approach could be the best route.

There are a lot of factors to think about in the decision process of what to do after you discover you have sales tax nexus.  (1) How clearly defined is nexus?  (2) What is the taxability of your products/services?  (3) What is your prior period exposure?  (4) What future plans do you have relative to the particular state in question?  (5) What future plans do you have relative to your business in general?  (For example, if you were looking to sell your business, you would want to ensure these prior period issues were resolved else they could hold up the sale or at least increase the escrow amount.)

Sales and use tax is an “art”.  There’s rarely a clear-cut answer.  The process is all about managing risk and cost.