How to prioritize paying multiple state tax nexus penalties

Key takeaways

• Sales tax nexus is the connection between a business and a taxing jurisdiction that creates a sales tax collection obligation.
• Nexus laws vary widely, which can make it challenging for businesses to determine when their activities trigger nexus with a state.
• Unpaid taxes from an overlooked nexus obligation can carry penalties and fees, which can disrupt a business’s cash flow and working capital.
• A business with unpaid taxes can use a voluntary disclosure agreement (VDA) to minimize the amount owed.

As businesses expand into new states, managing state tax nexus obligations can quickly become more complex. With different rules and requirements across jurisdictions, it’s not uncommon for businesses to discover missed filings or unexpected tax obligations along the way.

The good news is that these situations can often be addressed with a clear plan and the right support. By understanding where obligations exist and prioritizing next steps, businesses can regain control and strengthen long-term state tax compliance.

Nexus is established when a business meets the requirements to be taxed by a state or local government for operating in its jurisdiction. There are multiple ways to trigger nexus:

• Economic nexus is established when a business has enough sales revenue and/or transactions within a given jurisdiction.
• Physical nexus creates an obligation for businesses with a physical presence in the state, such as a store, a warehouse, an employee, or an office.
• Affiliate nexus is established when a business has a relationship with another business that has a physical presence in the state, such as an office or subsidiary.
• Click-through nexus creates an obligation for businesses that use a third-party to do business within the state, and the third-party has a physical presence.

Learn more about your nexus to determine where and when you need to collect and remit sales tax.

As businesses grow across multiple jurisdictions, keeping up with state or local tax nexus obligations can become more challenging.

If a filing or payment is missed, there may be additional costs or compliance steps to address, but identifying an issue early can help businesses resolve it more efficiently. Common consequences may include:

• Back payments: Depending on how long you were unaware of the taxes you owe, you could have back payments. The longer you go without paying, the larger the back payment will be.
• Penalty fees: Often, failing to pay taxes comes with penalty fees. Each jurisdiction will vary in the types of penalties and fees. Penalties can include failure-to-file, failure-to-pay, and fraud penalty, to name just a few.
• Interest fees: Back payments can accrue monthly interest, costing you even more to resolve the problem.
• Unexpected cash flow problems: As a business owner, you meticulously plan your budget, and tax consequences can throw off your entire plan — especially if the payment deadline is short. This could lead to cash flow problems, which could then affect other aspects of your business.
• Tax auditing: Your company is more likely to get audited due to the unpaid taxes. Whether it’s a common issue or a one-time mistake, state and local tax authorities take failure to pay seriously. Auditing is a time- and resource-consuming process that takes away from other business operations.
• Collections: If your taxes are unpaid for too long, you may receive a garnishment, lien, or levy against your business assets.
• Business license(s) loss: Depending on the jurisdiction, a break in local or state tax compliance can equate to license and permit suspension.
• Credit rating damage: Lack of payment or collection action can damage your business’s credit rating.

Dealing with forgotten sales tax nexus can lead to:

• Stress, mistakes, and confusion
• Business reputation damage
• Interrupted financial operations

With the right tools to help you through unexpected tax bills, you can still move forward with confidence.

It’s time to take a deep breath and get organized to tackle these tax and nexus issues.

If you haven’t received any notices from tax authorities, take initiative and figure out where you have state and local tax obligations.

Examine your current operations:

• Where do you have a physical presence?
• Do you have business partners, affiliates, or third-party vendors with a physical presence?
• Where do you have sales?
• Do you have employees in different states?
• How long have you had any of the elements listed above?

Once you understand where you have nexus, you’ll likely need to register for tax permits in those jurisdictions.

Review the jurisdiction’s tax rules and rates, then compile your historical sales and transaction records. Compare your sales figures against the local requirements to calculate your tax liability, and consider working with a tax specialist to confirm your final estimates.

By coming forward on your own, you may be able to enter a Voluntary Disclosure Agreement (VDA). A VDA protects businesses that come forward about their prior tax liabilities. It can come with perks like a limited lookback period or waived penalties.

You can also ask for a payment plan if you’re unable to pay everything back at once.

Now that you know what you owe and to whom, you must file your delinquent tax return. If you can’t pay back everything at once, prioritize deadlines. To expedite the process, use each jurisdiction’s electronic filing system.

Your payment should include the tax amount, interest, and any state tax penalty fees.

If you’ve arranged a payment plan, make sure you follow it exactly. Remember, the interest will still be active during a payment plan.

Once you understand the taxes your business is obligated to pay across multiple jurisdictions, you can plan accordingly and track things like state and local income tax or sales tax. You need to keep an exact record of all your sales, operations, and other transactions, and maybe even increase your prices to cover some of the costs.

Tax policies can change unexpectedly, so it’s essential to keep up with any changes to ensure you aren’t breaking state and local tax compliance rules. The best way to do this is to follow official government websites and get notifications... or, use tax automation software like Avalara!

If you’re feeling overwhelmed by the amount of tax back payments you owe, use Avalara Capital. With us, you can quickly access working capital from the platform you already use and trust.

Avalara Capital can securely pull your business’s financial data through existing integrations, helping streamline the application process without a hard credit check. Within minutes, you should be approved and get access to funds if you qualify.

Learn more about Avalara Capital today.

What happens if a business misses a state tax deadline?

When a business misses a state tax deadline, the original tax liability is still owed. The business may also be subject to penalties and fees, and the original amount owed will likely accrue interest until the business pays the tax in full. Unpaid taxes may also increase the likelihood of an audit or similar actions from tax authorities, so it’s imperative to act quickly when you recognize that your business failed to pay a tax obligation.

How can a business recognize when it has triggered nexus?

Business expansion actions often trigger nexus. These actions may include making sales (even online sales) to customers in states where you previously haven’t operated, opening new offices, allowing employees to work remotely, using a warehouse in a new location, or establishing partnerships with vendors across state lines.

What records help determine where a business may owe state or local taxes?

Any record that shows where a business has operated may help identify nexus. Examples include customer receipts, vendor invoices, payroll records, inventory lists, shipping manifests, and even prior tax filings. Your accountant should review any relevant records when determining if nexus exists, when it was triggered, and what taxes your business owes.

When should a business contact a state tax authority about unpaid taxes?

When a business recognizes it has unpaid taxes, it’s smart to consult with a tax professional as quickly as possible. With their guidance, a business can then contact the tax authority to discuss the unpaid taxes, their intent to pay, and their options for doing so.