Keeping up with frequent changes to sales tax compliance is stressful. Since the Wayfair Ruling, remote sellers have had to adjust and pay more attention to marketing, recruiting remote workers and business operations. It’s necessary to have a tax expert that is up-to-date with the tax rules and regulations as they change often per state.
With these new changes, companies can expect to see higher compliance costs for startups and small businesses and should be aware of how competition in their industry may shift due to selling out-of-state versus in-state.
Though we do recommend having a tax expert, it is important for you to understand how the market has changed. Here’s a rundown on how nexus may affect your business.
What is Marketplace Nexus?
Understanding marketplace nexus is the first step in being compliant with sales tax. Nexus is controlled by the U. S. Constitution. It identifies the connection between a taxable business and the state. In addition to sales tax, Nexus can affect income based taxes, capital based taxes, and gross receipts taxes.
Marketplace nexus benefits the state where sellers collect payments or fulfill orders. With this setup, the state can collect sales tax from a business even though they have no physical location in the state. For remote sellers, this becomes a financial matrix as each state operates differently.
If you are wondering if your business is included due to the type of product you sell, many states include electronic products, digital products and electronically downloaded products like Georgia, Maine and South Dakota. Hawaii includes intangible property while Arkansas includes digital code.
States have also adopted time periods for sales when including in their thresholds. It could range from the previous or current calendar year—which is the overall trend; the previous 12 months, like Pennsylvania and Texas; or 12 consecutive months, like Minnesota. Again, this is different for each state.
When do businesses trigger economic nexus?
There are a few things that may cause a business to have to collect and remit sales tax.
Economic nexus happens when a remote seller exceeds a certain amount of sales. For example, an out-of-state retailer who generates over $500,000 in taxable sales or has over 200 transactions in some states like California and Massachusets. Alabama and Mississippi look at sales that exceed $250,000. For a breakdown of these thresholds by states, click here.
For businesses that use dropshipping services, they too will need to pay attention. There are a lot of moving parts due to several parties being involved. The seller, the person purchasing products, the dropshipping company and possibly even the end-user. The location of everyone involved will determine the sales and use tax.
Remote workers can also trigger nexus. Many early-stage startups have employees that live out-of-state full-time as well as part-time commuters. When having a dispersed team, business owners should be aware that some states will require them to pay out-of-state taxes.
To make it even more complicated, some sellers can find themselves affected by economic nexus from their marketing campaigns. Email campaigns and any other tools used to generate business can trigger nexus in certain states that are taking full advantage of the Wayfair ruling. Those states have chosen to include advertisements to determine nexus. Those states are California, Texas, Utah, Florida, and Virginia. So having an out-of-state commercial on the radio, ad in the newspaper, or flyers could all be reasons that alert certain states to collect money from the seller.
Now that we know how nexus works and will affect remote sellers, it’s important to not overlook the details that will keep your business from being tax compliant. Like most business owners, your focus may be on the day-to-day operations, landing new clients or recruiting new team members. But staying organized and on top of your taxes will prevent any problems with the IRS or states that you do business in.
And if you are still thinking of doing those taxes yourself, there are a few reasons why you shouldn’t. You may end up owing more money due to mistakes or filing late because of the complexities of marketplace nexus. You’ll also waste time if you have to eventually hire someone after attempting to file them. In addition, you could miss out on the opportunity to earn R&D credits. Companies can earn up to $250,000 that can directly back into your business operations.
If you are looking for a tax expert or CFO to help you with month-end financial reporting, GAAP financials, nexus analysis, corporate or individual tax returns, or 409a valuations, our team of experts are here to share their experience and get you on track. You don’t want to miss the tax deadline. Connect with us here.
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