By now most businesses that sell online have heard about nexus, the connection that a company has with a jurisdiction that ignites a sales tax obligation. Nexus can be economic and based on a threshold of sales volume in a given time. Nexus can also be physical, created by inventory, employees or reps in a state or jurisdiction.
Nexus can also be dangerous. Companies that acknowledge their sales tax nexus still often overlook its impact and the sales tax obligations it creates.
That can lead to real problems.
A big case
Our recent survey of top finance pros in varied fields showed that more than a third (34%) know about economic nexus but still have taken no action. Almost one out of five (18%) don’t know about or only recently learned about Wayfair.
And that case is a key to today’s economic nexus in almost every state. In June 2018, the Supreme Court determined in South Dakota v. Wayfair, Inc. et al that an out-of-state seller could establish “nexus” through economic activity alone. The Court’s reasoning: the South Dakota law regulating home goods and furniture giant Wayfair did not burden retailers because only merchants doing a large annual business in the state were required to collect.
The decision opened the floodgates. States quickly set individual economic nexus triggers based on in-state sales, revenue or both: $250,000 per year in sales in a state, for example, or greater than $100,000 in sales or 200 or more separate transactions. States’ individual thresholds varied a lot – and still do.
Sellers found themselves having to evaluate changing tax responsibilities under both economic nexus thresholds and physical presence standards. Click-through nexus or cookies to track customer activity all became potential sources for sales-tax collection, and soon new laws required third-party marketplace facilitators to collect and remit sales and use taxes.
Questions – and penalties
Soon many online companies were left asking what products were taxable? How is technology being taxed? How are smaller companies supposed to keep up? How many tax jurisdictions are there, anyway?
(More than 10,000 nationwide, and still counting – even in Alaska, which has no state-wide sales tax, jurisdictions are banding together to make online businesses collect and remit local sales tax.)
Penalties for failing to file and remit state sales tax can be severe. Both civil and criminal statutes can apply. Civil statutes mainly apply to failure to file and failure to pay; many states levy a percentage of the total sales tax due. Criminal statutes carry more serious penalties.
Criminal penalties could apply if your company failed to pay any tax with the intent to evade the payment or if you have collected sales tax but not remitted it. Of course, penalties also apply if you knowingly file a false return.
Taxability. Once you’ve determined where you have nexus, you will need to understand if your products and/or services are subject to sales tax in these states and jurisdictions. In general, all tangible personal property (TPP) is subject to sales tax unless the state specifically excludes it.
Services are not tangible and can be entirely different in terms of taxability. Generally, services are not subject to sales tax unless they are specifically referenced. However, more and more states are taxing certain services, including an increasing number that tax software as a service (SaaS).
Taxability is something you need to monitor on per state.
Estimate your exposure. You’ve determined your nexus in a jurisdiction, but how far back have you had that obligation? Understanding when you first should have started collecting sales tax and calculating how much sales tax would have been owed to the state or jurisdiction over that time helps you estimate your risk and potential exposure. This amount, plus penalty and interest, would be expected of you in the case of an audit.
Repercussions of non-compliance. There’s no statute of limitations for unfiled returns: Tax liabilities for non-filing years can be audited indefinitely. Depending on the timeframe, it’s probable that it will be too late or too impractical to go back and collect from past customers. Penalties associated can start at 25% of tax liabilities, and even non-filing of zero taxable sales can result in penalties.
Non-compliance can also compromise your company’s financial statement. Unresolved obligations can complicate business operations such as mergers or acquisitions and obtaining funding. The expense of rectifying this situation falls on you.
All of this can add up quick and lead to a hefty payment needed to rectify what could cause big problems to a business of any size if you’re not prepared.
If you think your business may be impacted by sales tax and you haven’t quite figured out how to manage your obligations, contact TaxConnex. TaxConnex provides services to become your outsourced sales tax department. Get in touch to learn more.