New nexus: Funding the cost of expanding into new states

• New nexus may bring costs beyond the sales tax you collect.

• Expanding into multiple states could mean several new costs at once.

• Advanced planning helps you prepare for the potential cash-flow impact.

• Working capital may help bridge gaps when growth outpaces available cash.

Expanding into a new state is an exciting step for a growing business. It can also bring new sales tax obligations that aren’t always easy to anticipate.

As you reach more customers, you may establish sales tax nexus in states where you previously had no obligations. When expansion happens quickly, those obligations can arise in several states at once, adding new costs and cash-flow considerations.

A little planning can make those costs easier to anticipate and manage. Here’s what finance teams should consider as they plan for growth.

Sales tax nexus is the connection between a business and a state that creates an obligation to collect and remit sales tax. One common way businesses establish nexus is through economic activity in a state.

The tricky part is that nexus tax rules vary by state. According to the Tax Foundation, 45 states levy a state-level sales tax, while 38 states also allow local sales taxes.

States can also use different sales thresholds and measurement periods to determine when a business needs to register and start collecting tax. If you’re growing quickly, you may find yourself approaching several thresholds in quick succession.

For finance teams, that makes nexus part of the financial planning conversation, not just a tax or compliance issue.

Avalara’s state-by-state guide to economic nexus laws can help you understand how requirements differ across states.

At first, sales tax can seem fairly straightforward. You collect the tax from the customer and send it to the appropriate state or local tax authority.

In reality, several costs can come with establishing nexus.

Registration and setup

Catching up on past tax liabilities

Ongoing administration

For a growing business, the biggest challenge may not be the total cost. It may be when the cost arrives.

Think about everything else competing for cash during an expansion: inventory, new hires, marketing, technology, equipment, and other operating expenses. Nexus-related costs can fall in the middle of it all.

There’s also a timing issue: You might incur the costs of expanding into a new market before you’ve collected enough revenue from that market to cover the costs comfortably. If several states trigger nexus tax around the same time, the gap can become larger.

And if you discover an obligation after the fact? You could be dealing with a cost you didn’t plan for at all.

None of this means you should slow down growth. It simply means that sales tax obligations deserve a place in the financial plan alongside the other costs of expansion.

You don’t need to predict every future tax expense perfectly. Advanced planning can go a long way.

Start by:

1. Watching your state thresholds. Keep track of where sales are approaching economic nexus thresholds so you have time to prepare.

2. Estimating the costs. Consider registration, system setup, internal labor, remediation, and ongoing compliance.

3. Planning for multiple states. Don’t look at each state in isolation. Consider what happens if you trigger nexus in several states within a short period.

4. Adding nexus to your cash-flow forecast. Include potential tax and compliance costs alongside other expansion expenses.

5. Leaving room for surprises. If you’re growing quickly, give yourself some flexibility for obligations you may not have anticipated.

Avalara’s sales tax risk assessment can also help you identify potential nexus exposure and understand where you may have obligations.

If you have a healthy growth plan but need to cover expansion-related expenses before the resulting revenue arrives, a cash reserve or working capital solution can help bridge that timing difference.

The important thing is to look at the need in context. How much cash do you need? When will you need it? And how does that need fit into the broader expansion plan?

Nexus is one piece of the picture, not the whole picture.

Triggering economic nexus can be a sign of healthy growth into new markets. The key is making sure the financial impact doesn’t catch you off guard.

When growth creates a cash gap, Avalara Capital can provide working capital to help keep your business moving forward.

Bret Lawrence, Head of Content for Embedded Finance and Avalara Tax Desk contributor, writes about working capital and the challenges tax debt can pose to accounting and business professionals.