Growing companies face a lot of challenges—but one of the biggest ones? Compliance. From new rules on the federal level to nuances on the state level, complying with rules on how to run your business and pay taxes can become a challenge.
One of our newest sponsors, Avalara, took a second to speak with AccountingWEB on the challenges that businesses face in determining nexus. Though the AccountingWEB article was focused on the ways that accountants can help clients, it also brings up a wealth of great points that we may have missed in our initial articles on the topic.
Why is Nexus a Hot Topic?
Sales tax has always been part of business, but only recently did this become a hot topic. Why? Because many states—especially those with low or no income tax—have relied on sales tax to fund initiatives. But this became a problem after ecommerce took off, requiring states to take a different look at how they can collect money.
According to AccountingWEB,
“Prior to the epic rise of ecommerce, sales tax typically didn’t make the headlines or merit attention from company owners or executives. But the ever-increasing popularity of cloud, mobile and online sales tax has shifted the landscape dramatically, incenting lawmakers to reinterpret the rules and forcing companies to comply.”
From Quill to Wayfair
Initially, the Supreme Court ruled in the 1992 Quill decision that companies without close ties to a state didn’t have to collect tax from customers in that state. But three years after the Quill Decision launched, Amazon was launched, spurring a new era of ecommerce.
Quill was overturned in 2018 when the South Dakota v. Wayfair, Inc. decision concluded that South Dakota has the right to require out-of-state sellers to collect and remit sales tax on taxable sales into the state if those sellers met certain revenue or sales volume thresholds. In turn, states who were awaiting the decision moved to pass new laws. By 2019, 43 of the 45 states who collect sales tax had economic nexus policies in place.
Five Growth-Focused Activities That Create Tax Compliance Challenges
As companies grow beyond state borders or pivot their business models, new sales into new states pop up. This creates a variety of challenges for high-growth companies who start to gain traction. As noted in the article, here are five common activities that companies do that could expose them to new problems:
1) Domestic and Global Expansion
From selling in new markets to adding distribution centers to bringing on remote workers, expansion can add problems. Even for a company explicitly focused on domestic expansion, activities can trigger new connections. As noted in the AccountingWEB article:
- Remote Workers and Work-from-Home Challenges: Adding staff who work remotely (or at a home office) in a new state can add obligations to register, file, and remit taxes in that state and all its local jurisdictions. Learn more in Remote Work: Figuring out State Income Tax for Employees.
- New Warehouse Woes: Opening new warehouses or distribution centers — including drop-shipping warehouses — can similarly create new nexus connections. A couple states might be easy, but start expanding into five or more, and it becomes a real issue.
This gets even more complicated in global expansion. Now, instead of registering and filing for sales taxes, you’re going to need to start looking at value-added taxes—a completely different approach to sales tax.
2) Pivoting to Ecommerce
Put simply, Wayfair was focused on ecommerce. Driven by the pandemic and lockdowns, many retailers set up shop online, potentially exposing them to new risk. Many states and localities jumped on this and passed laws to collect on ecommerce transactions.
According to the article,
- 42 states (plus parts of Alaska, D.C., and Puerto Rico) have laws requiring marketplace facilitators to collect sales tax on behalf of their sellers.
- In some states, participating in affiliate programs or online advertising is enough to create that connection; roughly 33 states have affiliate nexus and 22 still maintain “click-through” nexus laws.
Often, growing companies find themselves the targets of enforcement. This is driven by the sales model and the modern approaches to marketing—those using online marketplaces, digital advertising, and internet referral programs may find themselves creating nexuses.
3) Dealing with Interesting Product-Based Rules
If you’re expanding into new markets, you may also be expanding your product offering. For some, digital goods or subscriptions could trigger new taxes, for others, something as simple as a lid or a straw might expose you. These ‘sometimes taxable’ items might create the most confusion, as the article says,
“For instance, in Colorado, straws and cup lids for takeout food are considered taxable, but the cups themselves are exempt. In Texas, customers buying five or fewer donuts have to pay sales tax — maybe it’s better to get the half dozen, since buying six or more means the purchase is exempt.”
4) Filing in Multiple States
You’re going to have to register, which adds new complexities. Not every state has the same approach or deadline to file, with some requiring prepay or pay on specific schedules.
“The frequency with which you’re required to file, as well as whether you’re required to pre-pay part or all of your expected sales tax obligations, can change as total sales made to customers in a state grow. Each state you file in makes the compliance picture exponentially more complex, requiring adoption of new sales tax rules and regulations that can get confusing fast.”
5) Becoming High-Profile
If you make a name for yourself, expect to be a priority target. Say you expand after building a cult following or are on track for an IPO. Expect higher scrutiny from the departments of revenue.
“This high visibility is great for growth, but it can be a magnet for states — and state auditors — looking to draw in more tax revenue from profitable ventures. Companies with a higher profile and higher revenues tend to be chosen for audits more often. And if they have multistate nexus, they could be looking at multiple audits.”
Automate Taxes, Mitigate Risk
State and local nuances in tax collection make for a complex part of running a business. Luckily, you do have options that can help you reduce noncompliance risk and grow comfortably. Automation is important and will help you to reduce your risk while increasing accuracy and visibility. If you’re looking to find a solution to handle all the challenges of your sales tax needs, check out Controllers Council sponsor Avalara in our Resource Directory.