Your sales tax obligations start with whether or not you have sales tax nexus. Without it, you have no obligation to collect and remit sales tax to specific taxing states or jurisdictions. Your sales tax nexus is determined by either a physical or economic presence within a taxing jurisdiction.
Most businesses have somewhat of a grasp of their physical presence, after all, it was the standard for sales tax obligations for over 50 years. Economic nexus is the newer standard and comes as an addition to physical presence. In this blog, we will showcase 5 important steps to monitoring your economic nexus footprint.
In 2018 the South Dakota v. Wayfair, Inc decision led to the largest change in sales tax in 50 years, redefining nexus as a certain amount of sales and/or a certain number of transactions in a state or jurisdiction. This is now referred to as economic nexus. Leading up to 2018, many states were pushing the boundaries of what creates a physical presence in order to force businesses to collect their sales tax. States implemented click-thru nexus, cookie nexus and Amazon laws, but it wasn’t until South Dakota challenged the online furniture retailer, Wayfair, for the untaxed sales they were making into their state that things made a big change.
Since this decision, 44 of the 45 states (plus DC) that have a statewide sales tax, have enacted economic nexus. Florida was the most recent, with laws starting in July, and Missouri, the final holdout, is just awaiting a signature from the governor to pass economic nexus as well.
Economic nexus can be determined by either a revenue or transaction threshold based on remote sales made into a state. On the surface, this doesn’t sound that difficult. The issue, like most things in sales tax, is that each state has different rules and you must understand each threshold for the states in which you have customers.
Monitoring Economic Nexus
To evaluate your economic nexus footprint, you should follow these 5 steps.
Step 1: Map out where you have sales
Anywhere you have a customer or client could potentially result in economic nexus for your business. Understanding where you have made sales helps you narrow down the list of states you need to monitor.
Step 2: Evaluate the economic nexus thresholds for the states in which you have sales
There are only two aspects of business activities used to assess whether businesses have economic nexus in a state:
- Sales revenue value
- Number of transactions (if you operate a subscription model, note that every renewal counts as a transaction)
Some states use just one of these measures; others use a combination. There is some consistency amongst the states as to the level of revenue and/or the number of transactions at which nexus is created. The majority of states use 200 transactions or $100,000 in revenue into a state, but that is not the case for all. It is important to understand the thresholds for each state.
Step 3: Understand the revenue figures and periods utilized for the states in which you’re making sales
While you are investigating the sales and transaction thresholds for the state in which you are making sales, you must also consider that individual states can potentially use three different revenue figures and periods for calculating sales revenue value.
Revenue figures can refer to:
- Gross sales revenue – all sales including tax-exempt sales and exclusions.
- Retail sales revenue – any sale other than a sale for resale.
- Taxable sales revenue – only taxable sales, with tax-exempt or excluded tax sales not counted.
*Check out our recent blog on this topic. Most states do rely on gross sales, but that’s not true for all. Be sure to understand which you need to be reviewing.
The period for calculations can also differ by state. They could be:
- Previous 12 months
- Current calendar year
- Previous calendar year
All of this needs to be evaluated and tracked for the states in which you’re making sales.
Step 4: Understand Taxability of Your Products/Services
This blog focuses primarily on economic nexus but once you’ve determined where you have sales and in which states you meet the thresholds, we must mention the importance of taxability. Before you are obligated to collect and remit sales tax, you have to ensure your products and/or services are taxable. This is also something that is not always straightforward as states do differ on what they consider taxable.
Step 5: Repeat steps 1-4
Even if you don’t yet meet the threshold in a state for economic nexus, business growth can change your requirements over time. It is therefore essential to monitor sales on a state-by-state basis regularly. Ensure you are evaluating these steps on a regular basis to ensure you don’t end up with penalties and fines associated with not collecting sales tax.
If you need help understanding your sales tax obligations and whether you should be collecting sales tax – get in touch. TaxConnex has experts to help answer these questions for you and to help you establish an ongoing process to ensure you remain compliant, even with the frequently changing rules of sales and use tax.