Once upon a time, retailers didn’t have to collect or remit sales tax on merchandise sold to out-of-state customers. Period. But with the phenomenal growth of online shopping over the last couple of decades, states realized they were missing a huge revenue opportunity. And so sales tax nexus was born.
The nexus concept basically says that if you have significant business connections within a state, you are obligated to abide by its sales tax laws. Although they vary from state to state, here are some of the most common factors:
- Your location — headquarters, branches, stores, warehouses, other real estates
- Drop shipper or distributor location
- Employee location — sales reps, delivery people, contractors
- Advertising and referral services location — including click-through advertising
- Economic nexus — exceeding a total sales dollar amount and/or number of transactions within the state
- Regular event attendance — trade shows, consumer fairs
To make things even trickier, states continue to expand their remote seller nexus rules, necessitating that you check regularly for the latest requirements.
eCommerce giants like Amazon have found it easier to simply register in every state as a preemptive strike against future regulatory and compliance hassles. For smaller businesses, this may not be a cost-effective solution. So how can you bullet-proof your sales tax strategy?
Read the rules.
Check with the taxing authority in each state where you think you might have nexus, and register for a sales tax permit when/as required. Also, you will be collecting tax based not on your home state’s rules, but on those of each state. So you need to know percentage rates, whether or not shipping charges are taxable, what classifications of merchandise are exempt, remittance due dates, etc.
Make sure you’re collecting tax on all channels.
For example, you may already be set up to collect sales tax on your own site. But if you start selling through Amazon’s FBA program, you may need to set up for some new states where Amazon is storing your inventory.
Notify the state when you no longer have nexus there.
Maybe you’ve moved your headquarters, or terminated your relationship with a distributor. Call or write the state’s department of revenue so they can update their records before the next return is due. Also, be aware that some states have “trailing nexus” that lasts for up to a year after your nexus in the state ends; you may have to file another return even if it’s for zero dollars.
Automate the process.
Good software makes compliance a breeze. Sales tax registration, returns, remittance, due date notifications, regulation updates, reporting tools and records maintenance, all done in just a few clicks, are some of the ways it can save you much time and effort.
Over the next few years, we expect that states will continue to close loopholes and challenge old legislation. Staying current will be the key to minimizing the time you spend on sales tax collecting, reporting, and remitting. And having the right processes and tools in place will be more important than ever.