Sales tax is more complicated than ever, especially in a post-Wayfair world. And what’s worse is that everyone who says they’re simplifying sales tax is still leaving the hardest parts – and the liability – up to you. In fact, a recent survey TaxConnex conducted through Porter Research found that the top sales tax worry of finance pros in 2021 was understanding changing nexus laws.
So where exactly do you start in understanding your sales tax obligation?
Your first thing you need to understand is where you’ve established nexus. Sales and use tax nexus is defined as a connection between a person or entity and a taxing jurisdiction, and is the basis for all your sales tax decisions. Without sales tax nexus, you have no further sales tax obligations to a state.
In assessing whether you have nexus in a state, it is important to look at whether your activities create either physical or economic nexus (or both). The law does not require you to fall into both categories – either one is sufficient.
As of March 2021, the only two states that charge a state-wide sales tax but have not adopted economic nexus rules are Florida and Missouri – though both have bills out for vote to enact economic nexus within their state.
In this blog, we’ll cover how to check where you have established economic nexus.
Step 1: Understand the rules associated with economic nexus
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 no consistency between states as to the level of revenue and/or the number of transactions at which nexus is created.
Step 2: Identify where you have customers
By looking at where you have customers you can narrow down the areas in which you need to evaluate sales and transaction thresholds.
Step 3: Understand the thresholds and particulars for the states in which you have customers
The majority of states have a $100,000 in revenue and/or 200 transactions threshold but this does differ so it is best to understand the particulars for the states in which you have customers. There are many maps available outlining the different thresholds per state but it is always best to verify with a sales tax professional.
To make matters even more complex, individual states can potentially use three different revenue figures and periods for calculating sales revenue value.
Revenue figures can be based on gross sales, retail sales or taxable sales and the period in which sales are calculated could be the previous 12 months, the current calendar year or previous calendar year.
By narrowing down where you have customers, you can eliminate some of the research and know where to begin.
Step 4: Evaluate nexus regularly
Even if you don’t yet meet the threshold in a state for economic nexus, business growth can cause this to change at any time. It is therefore essential to monitor sales on a state by state basis at all times.
It is also vital to keep track of individual state legislative updates, as the situation is constantly changing. A useful resource is the Sales Tax Institute’s Economic Nexus State Guide.
All of this is a lot to keep up with for any business, by outsourcing your compliance to a sales tax expert like TaxConnex, you can eliminate the burden of managing this on your own. Contact TaxConnex to learn more about our services.