Quick review of nexus
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.
The consequences of missing tax payments
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.
How to handle surprise state and local tax nexus
It’s time to take a deep breath and get organized to tackle these tax and nexus issues.
Determine where you have nexus
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.
Talk to tax authorities and determine what you owe
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.
Pay back anything you owe
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.
Establish a better system going forward
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.
Stay current on state tax nexus regulations
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!
Pay back payments quickly with Avalara Capital
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.
