This featured guest article presented by Avalara.
In the equally dynamic world of sales and use tax, innovative companies can easily create or encounter new or unexpected sales tax collection obligations. Offering new products or services, selling through new channels, or changing delivery methods can all affect sales tax.
New Products or Services
New products and services can lead to new markets — and new sales tax collection obligations (sales tax nexus).
You can trigger nexus by attending or participating in a trade show in another state, particularly if you take orders or spend a certain number of days there. Nexus can also be created if you compensate businesses in another state for referring customers to you.
Most alarming, thanks to state economic nexus laws it’s now possible to establish a sales tax collection obligation in another state simply by making significant sales there.
It can be challenging to figure out where you have sales tax nexus because sales tax nexus laws vary by state. But once you have it, you must register with the state and collect and remit tax on all taxable sales in that state — including online sales.
But what sales are taxable? Unfortunately, there’s no easy answer: What’s exempt in one state may be taxable in another. Making matters more complex, taxability rules are subject to change. For example, a growing number of states are choosing to exempt tampons and diapers but impose extra taxes on soda.
Before launching a new product or service, review sales tax nexus and product taxability rules in states where you plan to sell.
If you’re branching out from a brick-and-mortar store to the wide world of ecommerce, pack your sales tax calculator and get ready for an adventure. Most states with a general sales tax require remote retailers to collect and remit state and local sales tax. With more than 12,000 different local tax jurisdictions nationwide, that can lead to some serious headaches.
Seasoned online retailers moving products into brick-and-mortar stores may also confront new or different tax obligations, such as handling sales tax refunds for items purchased online and later returned to a store located in a different tax jurisdiction.
Companies looking to sell through a marketplace facilitator like Amazon, Etsy, or Walmart should be aware that states are increasingly requiring these facilitators to collect and remit sales tax on their behalf. More than 38 states have adopted marketplace facilitator measures, including the big states of California, New York, and Texas.
Unfortunately, marketplace facilitator laws don’t automatically free third-party sellers from registration and filing requirements.
Before selling through a new channel, assess how it could impact your sales tax nexus.
New Delivery Methods
As you grow, developing more efficient delivery methods may become essential. One popular option is to outsource deliveries by drop shipping goods through a third-party fulfillment center. However, if the fulfillment centers or drop shippers are in a different state, companies may be obligated to collect and remit sales taxes in that state.
To gain greater control over shipping, some companies use company-owned vehicles. While this has many potential benefits, it generally triggers a sales tax collection obligation in the states where deliveries are made.
Before investing in a new fleet of trucks or contracting with a drop shipper, gauge the impact these choices will have on your nexus footprint.
It’s becoming increasingly hard to grow a business in any direction without bumping into new nexus laws. Nonetheless, businesses must continually innovate, grow their market, and find more efficient methods of delivery — ideally without incurring costly audit fines and penalties (Wakefield Research estimates the average cost of an audit is $300,000).
It’s incumbent upon each business to properly identify and manage its nexus responsibilities. Understanding and planning for nexus will help reduce audit risk whether a business transacts in one state, through one channel, or across multiple states and multiple channels. But tax compliance is tricky.
Automated, cloud-based tax compliance services help companies around the world balance the demands of diverse, ever-changing sales and use tax rates and rules by:
- Cross-checking and updating rates, rules, and jurisdictional boundaries daily
- Providing real-time rate calculations
- Carefully managing sales tax exemption certificates
- Collecting sales and use tax
- Filing returns and remitting payments to appropriate jurisdictions
As you explore automated tax solutions, be sure to look for one that integrates seamlessly with your current financial software or application — and one that can stay relevant as your business grows and encounters new and more complex tax situations.