New Employees, Locations, or Warehouses? Don’t Overlook Sales Tax Nexus

Business growth doesn't always look like opening a new office or storefront. Sometimes, it means hiring an employee who works remotely, storing inventory in a new location, or partnering with a third-party fulfillment provider.

But these operational changes can have tax implications.

Businesses can create physical nexus in a state through a variety of activities, and those activities may not always be recognized as sales tax triggers by the teams making the decisions. 

What's at Stake?

Physical nexus can be established for reasons beyond traditional offices or storefronts.

Businesses may create nexus through:

• Remote employees
• Inventory storage
• Independent contractors
• Trade shows
• Third-party fulfillment arrangements

These activities can create sales tax compliance obligations even when a business doesn't have a traditional physical location in the state.

The challenge is that these changes are often managed by HR, operations, finance, or other teams, not necessarily the people responsible for sales tax compliance.

By the time the tax team becomes aware of a new employee, warehouse, or fulfillment arrangement, the business may already have an obligation to address.

How Operational Changes Can Create Sales Tax Exposure

Consider a business that hires a remote employee in a state where it previously had no physical presence. From an operational perspective, it may simply be a new hire.

From a sales tax perspective, however, that employee's location could potentially create physical nexus and trigger new compliance obligations.

The same can happen when a company begins storing inventory in a new state, works with an independent contractor, attends a trade show, or uses a third-party fulfillment arrangement.

That's why sales tax compliance needs to be part of the conversation before these operational changes are finalized.

Immediate Response Steps

If your business has recently expanded its physical footprint, or is planning to, there are several steps you can take to identify and address potential sales tax exposure.

1. Create an Internal Notification Process

HR, operations, and finance teams should notify the tax team before new hires, facilities, or warehouse arrangements are finalized.

Creating a formal notification process helps ensure the tax implications of operational changes are evaluated before they happen rather than after the business has already established a presence.

A simple internal process can help prevent important changes from happening without a corresponding sales tax review.

2. Audit Your Existing Footprint

Don't just focus on what's changing today. Take a look at your existing footprint.

This can help identify states where physical nexus may already exist and ensure your sales tax registrations and compliance processes reflect the business's current operations.

As companies grow, their operational footprint can change quickly. A periodic review helps keep sales tax obligations aligned with those changes.

3. Assess Historical Exposure

If your review identifies a state where nexus already exists, the next step is to understand the extent of the exposure.

Determine:

• When did we establish nexus? Establishing when the business first created nexus can help determine the period that may need to be addressed.
• Are your products or services taxable? Nexus does not necessarily mean every product or service is taxable. Taxability should be evaluated based on the applicable state rules.
• What is the potential prior-period exposure? Once you understand when nexus began and whether your products or services are taxable, you can begin assessing the potential historical liability.

Identifying this exposure early gives your business the opportunity to determine how best to address it.

4. Register Where Necessary

If exposure exists, businesses should evaluate their registration and compliance requirements.

Where historical exposure is involved, it may also be appropriate to evaluate Voluntary Disclosure Agreement (VDA) opportunities prior to registration whenever possible.

Addressing potential exposure proactively can provide more options than waiting for a state to identify the issue first.

Sales Tax Should Be Part of the Growth Conversation

Sales tax shouldn't be an afterthought when your business makes operational changes.

A new employee may seem like an HR decision. A warehouse may seem like an operations decision. A new fulfillment arrangement may seem like a supply chain decision.

But each can potentially have sales tax implications.

Building a process that brings the tax team into these conversations early can help your business identify nexus, evaluate exposure, and address new compliance obligations before they become larger problems.

Don't Wait Until After the Change

The best time to evaluate the sales tax implications of a new employee, location, warehouse, or fulfillment arrangement is before the change takes place.

And if a change has already occurred, it's not too late to assess your exposure. Understanding when nexus began, whether your products or services are taxable, and what potential back-tax exposure exists can help you determine the appropriate next steps.

More Sales Tax Risks to Watch

New employees, locations, and warehouses are just one of the business changes that can create unexpected sales tax exposure.

From sales growth and expansion into new states to product launches, staffing changes, audit notices, and mergers and acquisitions, there are several events that should trigger a closer look at your sales tax obligations.

Want to know what to do when a sales tax problem finds you?

Read the full Sales Tax Incident Response Kit for practical guidance on six common events that can trigger sales tax risk and the immediate steps your business can take to assess exposure, address issues, and strengthen your compliance processes.