Unexpected Growth Can Mean Sales Tax Obligations

This article was written for the Atlanta Business Chronicle Leadership Trust. To see the original post, click here.

Every business owner wants their company to grow. And when that growth is unexpected, it feels that much sweeter. But don’t forget that success that comes from selling into more states can also expand your sales tax burdens.

Businesses that sell into multiple states or jurisdictions have to pay attention to sales tax thresholds, and it’s not a one-time project. Almost all states and more than a few localities have enacted some form of economic presence as a way to enforce sales tax obligations ever since the 2018 Supreme Court Wayfair decision. Businesses must also be aware of triggering the obligation to collect and remit sales tax due to a physical presence. A physical presence is often seen as your physical office location but can be determined by where your inventory is stored, where employees work or where third-party contractors are utilized, among other criteria.

Having either a physical presence or an economic presence can lead to sales tax nexus, or the connection a business has with a state or taxing jurisdiction. Nexus can happen quickly (or over time) and for a variety of reasons.

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Ways of creating a sales tax obligation

In the United States, a business’s obligation to collect and remit sales tax starts with nexus. Sales tax nexus can be categorized into economic or physical.

Economic nexus requires remote sellers that may not have previously had a physical presence to collect sales tax because they’ve reached state and jurisdiction revenue thresholds or reached certain transaction thresholds. In South Dakota, for instance, the revenue threshold is $100,000 in sales or 200 transactions in the previous or current calendar year. Many states mirror these same thresholds, while other states set their own parameters. Florida and Missouri have not implemented any economic nexus standards — but stay tuned as each state is considering options.

Physical nexus means a business has a direct connection to a state. Most often this happens when a business operates out of a brick-and-mortar location in a tax jurisdiction. Other activities that can create a physical presence/nexus include employees or offices in a state, sales reps or agents visiting a state, delivery vehicles or maintenance or repair services in a state, attending trade shows in a new state, or inventory stored in a state.

Companies expecting growth

At the end of last year, my company commissioned a survey of 100 finance leaders to understand the growing concerns they face related to sales tax heading into 2021. Two-thirds of respondents said they plan to expand in the next year – either through hiring in new states or sales growth in new states.

This growth could indeed be inspired by exploding e-commerce and online sales, but what businesses may not realize if they are not familiar with sales tax standards is that if these increases in online sales occur in multiple states or jurisdictions, they can create sales tax nexus across state lines.

Another way growth can create unexpected nexus could be through adding employees. We’ve mentioned before that an employee’s location can create nexus, and during the pandemic, with more employees working remotely than ever, this could have caused issues. Luckily, the majority of states have continued to uphold that they will not count temporary work arrangements toward a physical presence. But, as businesses recover from the pandemic and remote work becomes more common, you can bet that states will look to collect — especially when job hiring increases and out-of-state employees are seen as more appealing since remote work has become more commonplace. Many businesses have adopted a work-from-home model and are not concerned with where the employee is working as long as the employee is productive. This can impact your sales tax obligations and should be something you consider when hiring, especially in states where you don’t already have a sales tax obligation.

Possible penalties

What can happen if you have nexus and don’t collect sales tax? Or you don’t realize you’ve expanded your sales tax footprint? What can you expect?

If a jurisdiction identifies you for audit or some other type of inquiry and they discover you should have been collecting and remitting sales tax, the implications can include assessments including penalties, liens and collection agents if you don’t pay the assessment. They can even hold you personally responsible via states’ responsible party laws.

There is no statute of limitations for unfiled returns, and unpaid tax liabilities can compound indefinitely. Depending on the time frame, it’s unlikely that you will be able to go back and collect from past customers. Penalties can be as high as 25% or more. And even non-filing of zero taxable sales can result in penalties. This can be quite a shock to any business, but especially small to medium-sized businesses that are just finding their footing.

Audits have always been a threat from tax jurisdictions, but the combination of the Wayfair case plus the pandemic-induced recession makes it likely that things are going to get worse before they get better. State sales tax audits could increase sharply in the coming months to help states recoup lost revenue. And 40% of our survey respondents agree, saying they expect sales tax audits to increase over the next two years.

Clearly, growth and expansion of your business can create new tax questions – and problems. By continuing to monitor nexus thresholds and understanding where your customer base is growing, you can help ensure you stay compliant.

If you have any questions or would just rather pass on the responsibility of sales tax to someone else, reach out. With TaxConnex, sales tax is all on us.

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sales tax nexus, sales tax

Post by Robert Dumas
May 04, 2021

Accountant, consultant and entrepreneur, Robert Dumas began his public accounting career on the tax staff at Arthur Young & Co., followed by a brief stint at Grant Thornton. In 1998, Robert founded Tax Partners, which became the largest sales tax compliance service bureau in the country, and later sold it to Thomson Corporation. Robert founded TaxConnex in 2006 on the principle that the sales tax industry needed more than automation to truly help clients, thus building within TaxConnex a proprietary platform and network of sales tax experts to truly take sales tax off client’s plates.