Avalara Whitepaper - Business Solutions for Tax Compliance

How Sales Tax Nexus Confusion Affects Your Business

Did you know that you are obligated to collect and remit sales tax where you conduct business?

Have you heard of sales tax nexus and do you know what it means for businesses?

If the answer is no, take a moment to discover how simple it is to manage nexus obligations and become sales tax compliant. By fully understanding this obligation, your business will ultimately reduce its exposure to future negative sales tax audits. Nexus is defined as the obligation to collect and remit tax where business is conducted, however, there are a range of ways nexus is created and these rules vary from state to state. Nexus determination can be confusing if you are unprepared to deal with it. To begin, almost every business has to calculate, collect, report and remit sales tax. More than likely, you are already paying taxes in your state and local jurisdictions as a result of business location. However, what happens when you sell something across state lines? Are you required to collect sales tax and how much? And to whom do you remit the tax? Nexus rules are established by individual states and every state defines them uniquely. Determining exactly how a rule applies to a business is critical. To safely navigate these challenging tax rules individuals should consult an accountant, tax attorney or other qualified sales tax professional to conduct a nexus study for the particular business. Making the nexus determination on your own is difficult, confusing and can lead to problems further down the road. Once you have determined where Nexus exists for your business, you are required to calculate, collect, report and remit that state’s sales tax each and every time you make a transaction. For this reason, sales taxes are remitted based on where your business is actually located because it is the physical structure of the business that actually creates nexus. However, there are several other scenarios where nexus can be applied and these should also be considered.

Scenario #1

The business has stores in multiple states. In this case, you will more than likely have sales tax obligations in each location.

Scenario #2

Nexus can be created by employing sales people who work in other states. For example, if your employees or contractors conduct any work at a customer’s out-of-state location, you may have nexus there as well.

Scenario #3

Regularly attending tradeshows or advertising in other jurisdictions beyond the physical location of a business can be considered Nexus in certain states. Additional factors that can create nexus obligations are:

Property Ownership: Owning or leasing any real or personal property in another state
Product Delivery: Having company personnel deliver products in another state
Product Storage: Renting or owning out-of-state storage, warehousing or drop-shipping facilities

Paying sales tax may be inevitable, but the hassle is not. Selecting a web-based transactional tax management solution that performs behind the scenes of financial or ecommerce applications is critical to comprehensively automate the sales tax compliance function. The selected service should work seamlessly behind the scenes, should integrate with the existing business financial application and must automate the entire tax compliance functions of the business. Avalara is the industry’s most trusted provider of sales and use tax information and the recognized leader in web-based sales tax services and solutions. Avalara offers a fully automated sales tax management and compliance solution via Software-as-a-Service (SaaS) called AvaTax. AvaTax integrates into any financial application and provides access to all jurisdiction assignments and real-time sales tax calculations. With thousands of registered users located throughout the U.S., Canada, and abroad – and, with more than 500 million sales tax calculations conducted annually, Avalara provides the fastest, easiest, most accurate and adorable way for companies to address their statutory tax requirements. Sales tax compliance is full of complicated rules and nexus is just one aspect with several other layers that must be considered in order to be fully compliant. With more than 11,000 sales tax jurisdictions across North America, and with rates and boundaries constantly changing, staying on top of nexus responsibilities is a substantial drain on your business and carries no benefit to your bottom line. As a result of implementing the AvaTax service, you will be freed from the burden of managing sales tax compliance processes and can join the thousands of Avalara clients who focus on revenue generating activities.

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