Accounting firms aren’t new to sales tax; many have taken on returns preparation and filing to meet client demand. However, sales tax compliance has become more burdensome for businesses since the U.S. Supreme Court issued its decision in South Dakota v. Wayfair, Inc. (June 21, 2018). In overruling a long-standing physical presence rule preventing states from taxing sales by businesses with no physical presence in the state (remote sellers), the decision freed states to impose a sales tax collection obligation on out-of-state businesses.
Following the Wayfair decision, one state after another adopted economic nexus, which bases a sales tax obligation on an out-of-state retailer’s sales and/or transaction volume in the state. As of this writing, economic nexus is in effect in 43 states, the District of Columbia, and a growing number of cities and boroughs in Alaska (where there’s no statewide sales tax). In fact, only two states don’t currently enforce economic nexus: Florida and Missouri. Delaware, Montana, New Hampshire, and Oregon have no general sales tax.
Economic nexus laws are compelling retailers to obtain sales tax permits and collect and remit sales tax in more and more states. Yet not all businesses are liable for sales tax in all states where they sell because most economic nexus states provide safe harbor for small sellers — those with sales or transaction volume beneath the state’s economic nexus threshold.
The small-seller exception is intended to ease the burden of compliance. In practice, it adds a layer of complexity because economic nexus thresholds differ from state to state. For example:
- California’s economic nexus threshold is $500,000 in total combined sales of tangible personal property in the state in the current or preceding calendar year
- New York’s economic nexus threshold is $500,000 in sales and 100 transactions of tangible personal property in the state (including Software as a Service, or SaaS) in the previous four sales tax quarters
- The economic nexus threshold in Illinois is 200 transactions or $100,000 in cumulative gross receipts from sales of tangible personal property and property sold incident to a service in the state in the preceding 12 months (determined quarterly)
Details about each state’s threshold are available in this state-by-state guide to economic nexus laws.
To be sales tax compliant, companies selling into multiple states must clearly understand each state’s economic nexus threshold (including which sales count toward the threshold and which do not) and know how close they are to meeting those thresholds. It’s a lot to monitor and track.
As businesses bow under the additional compliance burdens, they’re discovering the value of partnering with an accounting firm capable of providing multiple accounting functions. This is prompting accounting businesses to expand into sales tax returns preparation and filing services, shifting the burden of compliance to their shoulders.
Automating the returns process enables accounting firms to provide more services to more clients without bringing on more staff. It can turn a resource-draining manual task into a profitable service with a recurring revenue source. It can also improve client satisfaction and retention.
