Small businesses provide 55% of all jobs in the United States and account for over half of all U.S. sales. They’re the heart of local and state economies. At their best, they are adaptable, flexible, and customer oriented; as a result, they often foster fierce customer loyalty.
Yet there are advantages to scale. Big businesses, those with more than 500 employees, are often more established and have deeper pockets and reserves. They tend to have strong name recognition, and benefit from the economy of scale. Big businesses can put a lot of resources toward time-consuming activities such as sales tax compliance.
Sales tax compliance can be quite challenging for small business owners. For starters, it can be surprisingly difficult to know where they have nexus—a responsibility to collect, remit, and report sales tax. Once nexus is established, the proper rate for each transaction must be determined. Perhaps most challenging, businesses must keep track of the numerous laws, policies, and rules that govern sales tax and that vary from state to state.
Yet sales tax compliance doesn’t have to be hard. Read on for tips to navigate sales and use tax challenges.
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Know Your Nexus
Nexus has historically been triggered when a business has a physical presence in a state. However, this physical presence precedent is now being challenged on numerous fronts with state affiliate, click-through, and economic nexus policies:
• Affiliate nexus. Out-of-state sellers establish a sales tax obligation with a state through their relationship with in-state affiliates. States with affiliate nexus policies include California, Maine, and Ohio.
• Click-through nexus. Out-of-state sellers establish nexus through links on an in-state resident’s website. States with click-through nexus provisions include Louisiana, Nevada and Washington.
• Economic nexus. Out-of-state sellers must remit sales tax because the state has an economic need for remote sales tax revenue. States with economic nexus policies include Alabama and South Dakota.
The devil in these policies almost always lies in the details. For example, referrals must generate $50,000 in cumulative gross receipts (during the preceding 12 months) for click-through nexus to be triggered in Louisiana, while in Washington, it’s triggered when gross receipts for the same time period exceed $10,000. Here’s more info about state click-through nexus thresholds.
Change in remote sales tax laws could also arise from new federal legislation (such as the Marketplace Fairness Act or the Online Sales Simplification Act) or a Supreme Court decision (such as the overturning of Quill Corp. v. North Dakota).
Know the Proper Rate
Knowing what rate to apply to each transaction can be tricky. Most states use destination sourcing, basing the rate on the location where the buyer takes possession of the good or service sold. However, 11 states use origin sourcing, basing the rate on the location of the seller. In California, city, county and state sales taxes are origin-based, while supplementary local taxes are destination-based.
Once a sale is correctly sourced, the proper rate for that jurisdiction must be determined. While a handful of states have only a general state rate, 38 allow additional local taxes; and Alaska and Montana both lack a statewide sales tax but permit taxation at the local level. Relying on ZIP codes to find the rate is woefully inaccurate—one ZIP code could have multiple rates associated with it. Relying on manual methods, such as trawling through department of revenue sites, takes an enormous amount of diligence, patience, and time.
Know the Policy Pitfalls
Sales tax rates, rules, and regulations often vary a great deal from state to state. Businesses can unsuspectingly trigger a sales tax obligation in other states in myriad ways. For example:
• Drop shipping. While shipping goods by common carrier is unlikely to trigger a sales tax obligation in another state, the use of a drop shipper easily could.
• Event attendance. Attendance at just one trade show can trigger nexus in some states, particularly if sales resulted from the show. For example, a business may attend one Washington trade show per year without triggering nexus unless retail sales are made or orders are taken.
• Trailing nexus. A sales tax obligation can linger long after a business had a physical tie with a state. For example, a seller who generates sales from attendance at a Wisconsin trade show is liable for Wisconsin sales tax through the end of that calendar year.
As always, such policies are subject to change—and states hold sellers responsible for knowing when policy changes affect their business and responding accordingly.
Small businesses with limited time and resources should consider automating their sales tax to stay on top of all aspects of sales and use tax compliance. Automation can determine the correct rate for each jurisdiction, track policy and product taxability changes, manage certificates, and handle filing and remittance.
Marshal Kushniruk manages Avalara’s key strategic ERP accounts and independent software vendors, supporting their software and usability needs and ensuring that the highest-quality customer care and technical support systems are in place. His extensive industry experience includes creating and maintaining partnerships with hundreds of development, software solution, and value-added reselling partners worldwide. Before joining Avalara, Marshal was responsible for sales and marketing at Sulcs & Associates and has held leadership positions at Great Plains Software, Abacus Accounting Systems, Inc., and Group 21 Consulting, Inc., where he served as president. Marshal was named one of the 100 most influential people in accounting by Accounting Today magazine in 2008.