Complex rules and compliance tips for the trickiest states for filing sales tax returns

This post has been updated. It was originally published in November 2018.

Managing sales tax compliance is a tiresome and time-consuming process. While maintaining compliance doesn’t offer any rewards, failing to follow the rules can attract hefty penalties in the event of an audit. As businesses expand to multiple states and ecommerce demand surges, it’s getting even tougher to be tax compliant.

The intricacy of sales tax compliance gets amplified with ever-changing rules, frequent rate changes, and difficulty in monitoring expanding nexus laws. Though most states have their own rules and guidelines, some are more complex than others, which makes it difficult for businesses to understand where to register, file, and remit taxes.

In this blog post, we’ll discuss prominent sales tax filing challenges for businesses and we’ll highlight the states with the trickiest rules. We’ll also explore how automation helps companies handle an increasingly complex U.S. sales tax landscape.

Key sales tax filing challenges for businesses

Businesses that sell in multiple states must navigate countless sales tax challenges. Since each state imposes its own sales tax nexus laws, it can become increasingly difficult for businesses to register, file, and remit in the right jurisdictions. Common hurdles for businesses include:

Frequent rate changes: One of the biggest issues businesses face is the frequency of rate changes. State legislatures continually review and update rates, making it hard for businesses to keep track of the changes. Furthermore, local jurisdictions may also have their own rules and rates.
Filing requirements: Sales tax return filing varies from state to state. While electronic filing of returns is common in many states, other states only accept it if sales reach a certain threshold. To add to the complexity, some states still rely on paper forms.
Multiple payment methods: Managing sales tax payments for multiple states is a resource-draining process. Some states accept electronic payments only if a certain threshold is reached, while others accept payments in any form. Also, varying prepayment and filing schedules make the process even more confusing.
Local jurisdiction requirements: For states with local taxes (home-rule states), businesses may need to file separate local returns in addition to state returns. The onus of determining licensing and registration requirements as well as collection and filing of local taxes lies on businesses.
Expanded collection obligations due to economic nexus: Economic nexus thresholds differ across states, and businesses can trigger these thresholds by reaching a certain amount of sales and/or a number of sales transactions. California, for example, has set a threshold of $500,000 in sales only, while Arkansas uses a threshold of $100,000 in sales or 200 transactions. Some states exempt certain transactions from thresholds, adding another layer of complexity.

Several states are now seeking to cut transaction thresholds, which may alleviate some of the burdens, but the constant shift in nexus rules makes sales tax compliance a significant challenge for expanding businesses.

Top tricky states for filing sales tax

States with the highest populations and highest sales tax revenue tax collections (California, Florida, New York, and Texas) considerably impact the future of sales tax for other states. The Big Four are also considered the trickiest for filing sales tax returns. Complex nexus laws and other rules put forward by these states make collecting, filing, and remitting sales and use tax extremely confounding. Let’s take a quick look at what makes these states so complicated.

California	• Optional local jurisdictions • Multiple schedules • Monthly prepayment with quarterly return • Deduction breakdown requirements
Florida	• Early filing discount • Complex rate calculation, including the Florida Discretionary Sales Surtax: a county sales tax • Minimum monthly prepayment required
New York	• PrompTax required for large sales tax vendors • Different forms required for different filing frequencies • Offset quarterly filing requirements for some vendors
Texas	• Prepayment required based on revenue threshold • Location or outlet reporting requirements • Proposed consumer use tax notice and reporting for non-collecting sellers

Check out our guide, The tricky 10: States with the most complex rules for filing sales tax returns, to get the complete list of states with the thorniest sales tax rules.

The impact of expanded nexus

Sales tax nexus is the connection between a taxing jurisdiction and a business that triggers a sales tax collection obligation for the business. It used to be based on physical presence alone. However, on June 21, 2018, the Supreme Court of the United States overruled the physical presence requirement in its decision in South Dakota v. Wayfair, Inc. The court determined a business’s “economic and virtual contacts” with a state, or economic nexus, could be sufficient to trigger a sales tax collection obligation.

Since that seminal decision, 46 states, Puerto Rico, and the District of Columbia have adopted economic nexus provisions requiring certain remote sellers to collect and remit sales tax.

Expanded nexus provisions add to sales tax compliance burdens for businesses that need to be vigilant about crossing the thresholds set up by different states.

How automation is making sales tax compliance easier

As companies grow, so do their tax responsibilities. To effectively manage compliance, adopting sales tax automation software can help businesses reduce tax risk. Efficient nexus monitoring, registration, calculation, and filing and remittance saves time and money.

Avalara automates sales tax compliance for thousands of businesses, helps reduce audit risk, improves accuracy, and frees resources for more strategic tasks. Learn how Avalara can help you simplify your sales tax responsibilities through automated sales tax filing.

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.