Following the landmark South Dakota vs. Wayfair Supreme Court decision in 2018, it’s fair to say that the sales tax landscape has changed significantly. Since the decision, many businesses that do business outside of their home states have been forced to evaluate whether they have sales tax nexus in those states.
While some guidelines do exist, the reality is that sales tax nexus regulations are different across all 50 states. This makes compliance extremely challenging for businesses with a nationwide, or even regional, presence. Stakes are high: if a business fails to collect and remit sales tax in states where they have nexus, the penalties are severe. Additionally, the tax burden is shifted away from the consumers and onto the business itself.
With such significant consequences, it’s vital for business owners to have both a basic knowledge of the concept of sales tax nexus and a partnership with a CPA that’s well-versed in the intricacies of this field. In this overview, we’ll outline some of the key concepts of sales tax nexus and explore the steps business owners should take to determine whether their business has sales tax nexus in a particular state.
Sales Tax Nexus: A Definition
From a tax perspective, nexus essentially means connection. If a business has economic nexus to a state, it’s judged to have a significant enough connection to that state to be liable to taxation.
Sales tax nexus regulations have evolved significantly since 2018. After the Supreme Court decision, many states passed amendments to their laws with the aim of creating a more level playing field for local businesses.
Before 2018, sales tax nexus was determined primarily by physical tests: whether your business had an office, manufacturing facility, or retail location in a particular state. This was extremely favorable for eCommerce businesses. Their lack of physical presence in a state allowed them to not charge consumers any sales tax, resulting in as much as a 9.5% discount to the price paid by consumers.
Today, sales tax nexus is typically determined by economic nexus. In many states (including Kentucky, Indiana, Ohio, and others) any business with either $100,000 in total revenue or over 200 transactions is considered to have sales tax nexus. In larger states, including Texas and California, those thresholds are higher, at $500,000 in total revenue.
Sales Tax Nexus vs. State Income Tax Nexus
It’s important to note that sales tax nexus is different from state income tax nexus. It’s a common misconception that any sales to customers in a particular state create a state income tax liability, but that’s actually not the case. Often, businesses have sales tax nexus in a state but do not have state income tax nexus.
A federal law, Public Law 86-272, provides a level of protection to businesses that sell tangible personal property outside of their home state. However, this exemption does not apply to every business and only applies to state income tax. In addition, PL 86-272 was altered significantly as a result of the Multistate Tax Commission’s (MTC’s) expansion to incorporate e-commerce activities.
How to Determine If Your Business Has Sales Tax Nexus
The process of determining where your business has sales tax nexus is not a straightforward one. It’s important to break down your business’s activities in each state and define whether they meet that state’s sales tax nexus thresholds.
There is a range of sales tax exemptions, including product-based exemptions, use-based exemptions, and buyer-based exemptions. Some of these exemptions are broad: for example, in Kentucky, most groceries and prescription medications are exempt from sales tax. However, in many instances, these exemptions are much more narrowly defined – making it necessary for businesses to apply for a sales tax exemption certificate for certain activities.
These complexities underline the importance of partnering with a CPA firm with a comprehensive understanding of sales tax nexus laws across the nation.
Take a Proactive Approach to Assessing Sales Tax Nexus
It’s vital that your business takes a proactive approach to determining its sales tax nexus obligations. If businesses ignore the regulatory changes enacted since 2018 and fail to remit sales tax to states where they have nexus, the consequences could be extremely damaging.
State tax authorities regularly audit businesses to determine whether they have economic nexus in their state. Penalties for non-compliance are severe: your business may owe years of back taxes and face additional fines. Crucially, the burden of paying for the tax falls on your business, not on the consumer, as it originally would have.
Beyond these immediate financial retributions, failing to comply with sales tax regulations can also cause issues in the due diligence process for an investment or potential sale of your business.
If your business failed to meet your sales tax obligations in recent years, all is not lost. Many states have amnesty initiatives and voluntary disclosure programs. This makes it possible to retroactively fix the issue. While your business will still have to pay the tax you owed, penalties may be significantly lessened. Working with a qualified CPA throughout this process ensures your business retains anonymity.
Taking a proactive approach to determining your business’s sales tax nexus also opens the door to new opportunities. If you have meaningful economic nexus in any given state, it’s possible your business may qualify for tax credits provided by that state. Consulting with your CPA before expanding into a new region enables you to understand these opportunities, minimize your overall tax burden, and grow your business in a tax-efficient manner.
Partner with LBMC
Understanding sales tax nexus requirements is key to your business’s long-term success and sustainability. But there’s no doubt that this is a complex topic – particularly if your business offers a diverse range of products and services in multiple regional markets.
Ensuring your business fulfills its obligations to collect sales tax in certain states demands the support of an experienced accounting firm that understands the intricacies of sales tax nexus regulations across the country.
At LBMC, we’re proud to provide sales tax nexus advisory and planning services to businesses operating all over the United States. Our experienced tax advisors are available to help assist with tax notices, audits, evaluations of nexus, and reviews of your business’s current processes.
To learn more about how LBMC can support your business in understanding your sales tax nexus exposure and compliance requirements, contact us today.