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How fast business growth leads to sales tax challenges

  • Mar 21, 2017 | Suzanne Kearns

Most business owners have one thing in common: They want to grow their company. And although a larger business typically results in more profits, it can also come with additional sales tax responsibilities. That’s why it’s important to plan for your growth.

If you understand how to stay in tax compliance before your business begins expanding, you won’t have to waste valuable time learning the rules while you’re focused on growing your business.

So, how does business growth affect tax compliance? Here are three ways it can change your collection responsibilities.

Adding new products

Along with growth comes new product offerings, and because not all tangible personal products are taxed the same way in every state, you’ll need to plan ahead.

For example, all states require you to collect sales tax on print books (with some exceptions in the educational arena), but if you expand your offerings to include digital books, you’ll need to collect sales tax on them in some states but not in others. And if you sell candy, you won’t need to collect sales tax on it Nebraska, but in Colorado, candy is taxable unless it’s bought with food stamps.

Knowing in advance which states will tax your new products--and how--will go a long way in making your business expansion run smoother.

Expansion to new markets

When you grow your business, you’ll likely begin selling in new states, which comes with a whole host of additional sales tax rules. For example, as you grow you may need to add warehouses or an office, and these things give you a physical presence in states. Once you’ve established a physical presence, you have nexus that requires you to collect sales tax in those states.

In addition, some states have economic nexus, which means if you make over a certain amount of sales in that state, you’ll have nexus and will be required to collect sales tax on all the sales you make in the state.

Other states have enacted click-through nexus, which means if adding affiliates is a part of your growth strategy, you’ll be required to collect sales tax in the states that have that law. For example, California give you nexus if people from their state refer your company to others in the state and the sales exceed $10,000, no matter how those referrals come about.  That means a blogger you run ads with could write about your company, and if it results in $10,000 in sales, you will have nexus in the state. 

Hiring new employees

It’s almost impossible to grow a business without hiring additional employees, but you should know that doing so will create nexus in additional states. For example, if you hire a remote employee such as a sales person, installer, agent, representative, or any other type of employee, it will give you nexus in that state, along with sales tax collection responsibilities.

Growing your business is an admirable goal, but if you’re going to do it, be sure to plan ahead for sales tax compliance. After all, the act of growing a business is difficult enough--don’t complicate it by ignoring the sales tax implications.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Suzanne Kearns
Avalara Author Suzanne Kearns