Sales tax risk: What to ask (part 2)

Assessing a company’s sales tax risk and exposure starts (and maybe ends) with the right questions.

As we saw in a previous blog, these questions cover a range of topics and hinge on knowing many sales tax terms. Let’s look at some of the questions discussed in our recent webinar “What to Ask Your Clients to Identify & Manage Their Sales & Use Tax Risk.”

Are you comfortable with your sales tax nexus footprint?

“Nexus” is the connection between a company and a tax jurisdiction. Economic nexus was ignited nationwide by the 2018 Supreme Court Wayfair decision involving South Dakota.

Economic nexus thresholds are determined by dollar volume or quantity of sales into a state in a previous amount of time, often a year. (The latter is known as a transaction threshold, and more states are beginning to drop it.) Economic nexus thresholds vary widely state to state.

Did your e-commerce sales increase this year? Generally, when you hit $100,000 in sales in state/jurisdiction, it’s a good idea to re-examine your sales tax nexus footprint. Did you expand sales into Canada? Our neighbors to the north hare several similarities with the U.S. over sales tax, but there are key differences that are even greater when you sell into other countries.

Have you added remote employees?

Also, does your business hire contractors or use third parties to provide services connected to your product such as installation or sales? A growing number of companies answer “yes” these days, and those workers can create physical nexus, which can also involve offices, sales reps, in-house delivery personnel or even just frequent presentations by staffers.

To cite a burgeoning revenue stream for many e-commerce companies, selling through marketplace facilitators such as Amazon can create physical nexus if those facilitators store your inventory in a state though, as with transaction thresholds, this too might be changing.

Have you done a taxability review?

Like nexus, taxability differs by state. Tangible personal property (TPP) generally incurs sales tax; services still often don’t. TPP can be exempt from sales tax depending on the product, the state and if it’s sold during a sales tax holiday. Some buyers such as non-profits are also often exempt from sales tax, though be sure to get an exemption certificate to validate not collecting sales tax.

Technology is creating more sales tax obligations: SaaS, telecom, digital services and advertising and other communications tech now requires more collection of sales tax (not to mention “fees”) in a growing number of states and jurisdictions. This makes a confusing array for companies simply looking to comply with sales tax laws.

Are you looking to sell the company or get venture capital?

M&A usually means a buyer will scrutinize a seller through due diligence – and sales tax has come to be much more prominent in these examinations. Buyers often accept no sales tax risk, and current or past sales tax exposure can cripple or kill even a deal.

Sellers must be ready with measures to mitigate any unearthed exposure, including explanation of exempt customers and non-taxable products/services and measures already taken such as retroactive registration with states, XYZ letters and voluntary disclosure agreements.

A company can do a lot to get a handle on their own sales tax exposure – if the right questions are asked. Contact us to learn more.