If your online company looks to expand its interstate sales in 2021, know one thing: Your plan involves risks and new responsibilities. The key is learning how to manage both, as sales tax non-compliance or errors can bring stiff penalties.
You’re not alone
Almost two out of three businesses (65%) plan to grow across state lines in 2021, according to a recent TaxConnex-commissioned survey of 100 financial leaders and their concerns about multi-state sales tax obligations.
Surveyed companies’ concerns heading into the new year were:
- Having the knowledge and resources on staff
- Keeping up with changing nexus rules in each state
- Understanding the taxability of my products and services
- Being audited
- Charging and collecting sales tax in an increasingly large number of states
About one in five (19%) companies said they don’t have the right resources on staff; nearly one in 10 (8%) said they weren’t able to hire fast enough due to budget limitations or a hiring freeze.
Overall, 71% of respondents to our survey weren’t completely satisfied with how they manage sales tax. (Almost half [46%] of respondents still manage nexus – their sales tax footprint in a tax jurisdiction – in-house and 47% prepare and file sales tax returns in-house.)
Risks of hiring – especially now
Online sales are probably more popular than ever right now. The potential for growth is huge. And adequate personnel becomes key when your sales tax obligations grow along with your company.
As the pandemic continues, many companies still have staff working remotely. Maybe you’ve discovered that employees can work remotely full-time and still be productive, and so you’re thinking of slashing costs on office space. As we adapt to the new normal, many may continue to work as they’ve become accustomed over the last several months. That will save many businesses on office space, but may result in additional sales tax obligations. If your business has employees working in a different state than where your office is located, or if you hire employees outside of your home office state you could be creating nexus in a new state.
Nexus means you have obligations to a given taxing jurisdiction, and it comes in two forms: economic nexus which was reinforced by the U.S. Supreme Court’s landmark Wayfair decision in 2018; and physical nexus created by a direct connection to a state or tax authority. Examples of the latter include a brick-and-mortar location – or the presence of employees.
As your business grows, both in revenue and employee size, your sales tax obligation could be growing with it. Attempting to handle expanding sales tax obligations in-house (no matter where the employees are) also comes with risk. Keeping up with compliance involves a lot:
- Figuring out if your products are taxable in a jurisdiction.
- Where do you have nexus? You must analyze your sales patterns and especially monitor or review sales into new states. Nexus thresholds and other requirements can also change frequently, and increased online shopping during the pandemic might mean you hit nexus thresholds faster.
- Calculating sales tax. For some products, such as Software as a Service, this can be complex. For others it may be a bit more simple, but it is a process someone needs to monitor and adjust as taxability laws change and your company expands nexus requirements.
- You’ll have to register to collect and remit sales tax in the necessary states
- Maintain a calendar to show where your business is registered and your filing requirements;
- Set up a system to retain, track and respond to correspondence from tax jurisdictions.
Clearly, compliance is not something you should leave to chance as your company expands online sales nationwide.
As sales tax continues to become more complicated, know you have someone that can help. When you work with TaxConnex, we eliminate the burden and complexity of sales tax. Your employees have enough on their plate already, let the experts manage sales tax for you. Contact us to learn what it means when sales tax is all on us.