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.
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.