What’s a sales tax risk assessment, and why should you get one?
Any business with customers in other states is at risk of creating sales tax nexus with those states, which is essentially an obligation to register with the tax authority and comply with applicable sales and use tax laws. Yet simply making a sale into another state doesn’t necessarily give an out-of-state business nexus. Sales tax laws are more nuanced than that.
A sales tax risk assessment can help you determine where you have sales tax nexus and where you’re most at risk of establishing it. But first, it’s worth reviewing how sales tax nexus is created.
How is sales tax nexus created?
There are several ways to create sales tax nexus, including having ties to in-state affiliates. Yet the most common ways businesses establish nexus is through physical presence or economic activity in a state.
Physical presence creates sales tax nexus all states with a sales tax (Alaska, Delaware, Montana, New Hampshire, and Oregon have no statewide sales tax, though Alaska allows local sales taxes). Having a physical presence in a state includes leasing, owning, or renting a physical facility such as an office or warehouse. It can also include inventory in the state, like when a marketplace seller has inventory in a marketplace facilitator’s warehouse. Beyond these obvious physical ties, physical nexus can be established through the presence of employees or contractors in a state, even temporarily: How much or what type of physical presence establishes nexus varies by state.
Economic nexus triggers are even more varied. They’re also newer and less understood, since a physical tie was a requisite for nexus until the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. (June 21, 2018). Because of the Wayfair decision and subsequent state action, today a remote business can establish nexus solely through economic activity in 43 states, the District of Columbia, and some local jurisdictions in Alaska. Florida and Missouri are the only two states that have a statewide sales tax but don’t enforce economic nexus.
Most economic nexus laws provide an exception for small sellers — those selling beneath a distinct economic nexus threshold. Though this is undoubtedly appreciated by extremely small sellers, it makes determining nexus more complicated because every state’s economic nexus threshold is unique. Thus, you need to constantly monitor sales tax nexus laws and your sales into all states to determine whether you’ve met an economic threshold. It’s the kind of job that gives new meaning to the term “herculean task.”
Fortunately, you don’t have to ascertain your nexus risk on your own.
How a sales tax risk assessment can help
Avalara’s in-depth Sales Tax Risk Assessment gives you a detailed analysis of your sales tax obligations. You’ll learn where you likely already have sales tax nexus (but didn’t know it) and where you’re most at risk of developing it. All you need to do is fill out a sales tax nexus questionnaire. That can be hard enough — but providing that information can save you money. If you don’t have the bandwidth for this and would rather hire an accountant to sift through all your records, we have many partners who can help.
Once we know what you sell, how much you sell, and where you sell it, you’ll receive a comprehensive written report detailing your sales tax liability risk, as well as a consultation with a nexus specialist — during which you can ask questions and deepen your understanding of your sales tax risk.
If you discover you have sales tax nexus in one or more states where you’re not registered to do business and are not already collecting and remitting sales tax, our team will help you understand your options. These may include pursuing a voluntary disclosure agreement (VDA) with the state, which can limit the look-back period, reduce or waive penalties, and provide some audit protection, or registering through the Streamlined Sales and Use Tax Agreement (SST).
No matter your situation, Avalara’s sales tax experts will help you understand your sales tax risk and options. What you decide to do with that information is up to you.
Why get a sales tax risk assessment now?
If you’re selling into states where you’re not registered, you’re at risk of developing an obligation to collect and remit sales tax. And the more time passes, the greater your risk of a negative audit findings, penalties, and interest. States need revenue, especially now: The COVID-19 pandemic turned many states' budget surpluses into deficits in a matter of months, and the future is uncertain.
Many businesses have suffered during the pandemic, and states are often willing to work to alleviate the tax burden for struggling businesses. But some businesses — especially ecommerce businesses — are thriving. If you’re one of them, you may pique the interest of states. And if you’re not collecting as you should, you could end up owing back taxes, penalties, and interest.
It’s simple, really: You can’t be sales tax compliant if you don’t know where you have an obligation to collect and remit sales tax. So, remove the guesswork. Find out where you likely have sales tax nexus with Sales Tax Risk Assessment.
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