Sales tax is complicated, and it’s not likely to get easier anytime soon. But that doesn’t mean it has to eat up resources and be a burden on your business. We’ve partnered with Avalara to help you determine the most effective way for your business to manage every aspect of sales and use tax compliance, including calculations, state registrations, and returns filing. Some businesses need an automated sales tax solution to stay above water while some can be managed in house, however, all businesses need to consult an expert to determine a strategy that works for them.
Why small businesses need to pay attention to sales tax in 2019
Small business owners generally know they need to deal with sales tax in their home states, but many don’t think about sales tax in other states. That luxury is rapidly disappearing now that states have the right to tax remote sales.
On June 21, 2018, the Supreme Court of the United States ruled in favor of the state in South Dakota v. Wayfair, Inc., a dispute over South Dakota’s economic nexus law. Prior to the Wayfair decision, states were prohibited from imposing a sales tax collection obligation on businesses with no physical presence in the state. The Supreme Court overruled the physical presence rule in its decision in Wayfair and found that a business’s economic and virtual contacts with a state could be a sufficient basis for sales tax nexus (the connection between a business and state that permits the state to tax the business’s sales).
Wayfair has enormous implications for any business that sells, or plans to sell, across state lines. Since the June 2018 decision, 30 states have adopted economic nexus policies that impose a sales tax collection obligation on businesses with a certain amount of economic activity in the state (i.e., volume of sales and/or number of transactions). And in most states, the threshold isn’t all that high, so small businesses should sit up and take notice.
What small businesses need to know
To remain compliant in the post-Wayfair world, businesses of all sizes need to:
Know which states tax remote sales (an ever-expanding list). To date, 30 states have adopted economic nexus policies that base a sales tax collection obligation solely on business activity in the state. Several other states enforce slightly different remote sales tax laws. And already, numerous states have indicated they’ll tax remote sales in 2019 or 2020, including Arkansas, Missouri, and Texas.
The takeaway: Pay attention to which states have remote seller sales tax laws now and which are planning to adopt one. Avalara’s remote sales tax resource page is a good place to get your footing.
Scrutinize state small seller exceptions. Approximately 24 states have followed South Dakota’s lead, providing an exception for businesses with less than $100,000 in sales or 200 transactions in the state in the current or preceding calendar year.
However, states are free to adopt different thresholds, or even bypass a small seller exception altogether. Several states have higher thresholds of $250,000 in sales or 200 transactions; and thresholds in Idaho and Pennsylvania are much lower, at $10,000 in annual sales.
Furthermore, each state bases its threshold on different transactions. In some, only taxable or retail sales apply, while other states include exempt sales as well. Some limit the threshold to sales of tangible personal property, while others include sales of services and/or digital goods.
The takeaway: Know the small seller exception in all states and monitor your sales so you’ll know when you surpass them. Avalara’s state-by-state guide to sales tax nexus rules can help you assess your risk.
Have a sales tax strategy. With a growing number of states on the hunt for remote sales tax revenue, businesses small and large should take sales tax seriously. Pay attention to what states are doing to increase their remote sales tax revenue, bearing in mind that state sales tax policies are subject to change. Develop a strategy to continually assess your sales tax risk.
The takeaway: Reach out to a trusted tax advisor or sales tax expert. If you need help finding someone. Avalara’s sales tax expert directory provides a list of state and local sales tax experts.
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