It’s that time of year – holiday shopping is in full swing. While the pandemic has continued to wreak havoc on retail locations, online sales continue to skyrocket. So while you’re busy with closing out your year, hopefully on a higher note, don’t forget about your sales tax obligations or you could wind up with a big lump of coal.
This year, Cyber Monday falls on Nov. 30, just 25 days before Christmas and 10 days before Hanukkah. Because of the pandemic, many businesses have cancelled their black Friday promotions and included sales throughout the month of November, both online and in store.
Adobe Analytics forecasts that U.S. online sales this November and December 2020 will hit $189 billion. That is almost two years’ growth in one holiday-shopping season.
Larger retailers most likely have already triggered nexus across the country, but smaller retailers may for the first time hit sales levels that trigger sales tax obligations in new states and jurisdictions.
Here are four steps you can take now to help you maintain sales tax compliance throughout the holiday shopping season.
1. Understand your current, total nexus. Nexus, the connection a business has with a state or taxing jurisdiction, may obligate your company to collect and remit sales and use tax. Nexus comes in two forms: physical and economic.
Physical presence used to be the only consideration where sales tax nexus is concerned: an office or warehouse location; employees travelling for meetings or conferences; or employing third-party contractors in a state. For example, your company headquarters in a state probably means you have nexus in that state.
Economic nexus is a much bigger consideration – and it has been since 2018, when the US Supreme Court upheld in South Dakota v. Wayfair that a state could impose nexus on an out-of-state retailer based on the quantity of sales in that state over a certain period. Other states soon pounced on this, and today 43 of the 45 states that impose a sales tax have enacted economic nexus requirements.
In most states, the economic nexus threshold is $100,000 or 200 transactions, but rules can vary. Obviously, your nexus footprint this year might get bigger faster than you think.
2. Know if your products/services are taxable. Not all are. Check with the states where you expect your sales will be greatest The presumption is that all sales of tangible personal property are taxable unless specifically enumerated or otherwise exempt. Exemptions apply to scenarios where the product or service or transaction is otherwise subject to sales and use tax but for which there is now a legislated exemption.
If your customer claims tax-exempt status, be sure to document that status with an exemption certificate. Without it, you could be held liable for the sales tax you didn’t collect. States also have specific – and often differing – requirements for exemption certificates.
3. Know the economic thresholds for your hot states. As mentioned before, most states have added a lot of details to their nexus thresholds – and states refine them all the time. Analyze your sales patterns from last season and monitor or review sales from new states. This should give you some idea of where you might cross nexus thresholds (if you haven’t already).
A state-by-state search for departments of revenue or taxation should get you started. You can also contact your CPA, your current sales tax compliance partner or monitor changing thresholds on our economic nexus guide.
4. Develop your go-forward strategy for both the short- and long-term. This record holiday-shopping season should inspire you to create a compliance plan for what’s only going to become a bigger potential tax obligation.
This can include establishing a tax compliance filing process, understanding how you will manage your obligations going forward (in-house or outsource it) and determining if you have previous exposure and the best option to mitigate that risk.
Sales tax compliance can seem overwhelming, but it doesn’t have to be a burden– utilize the resources available and feel free to contact us for all your sales tax compliance needs.
Want to learn more on this topic? Download our eBook The Guide to Getting Sales Tax Right.