In the age of remote sales and e-commerce, where physical borders are the last thing on your mind, a critical aspect of running a business can still catch you off guard: sales tax. Many business owners are surprised that states can collect sales and use tax regardless of whether your business has a physical presence within their borders. This concept, known as economic nexus, has become increasingly important in recent years, and businesses of all sizes must understand its implications to avoid financial burdens.
Regarding sales tax, nexus is crucial for businesses selling across state lines. It refers to the connection a business has with a specific state, determining whether it is required to collect and remit sales tax there.
Why is nexus important? Once nexus is established, businesses become responsible for:
- Charging the correct sales tax rate for that state
- Maintaining accurate sales records
- Filing sales tax returns on time
Before the internet and the introduction of e-commerce, most businesses were only required to pay sales and use tax within their state because they had physical operations there. The Supreme Court’s decision in the 1992 Quill Corp. v. North Dakota case established that a state could not require a business to collect and remit the sales tax if the business lacked a physical presence in the state.
As society modernized and many businesses transitioned to e-commerce, this posed many questions surrounding businesses and their requirement to pay taxes whether they physically operated in a particular state. In 2018, the Supreme Court overturned their previous ruling in the case of South Dakota v. Wayfair, Inc. Due to this more recent ruling, businesses must pay sales and use tax to the state, whether they have a physical presence or not.
Under these new rules, many businesses qualify for the economic nexus if the business generates at least $100,000 in sales or engages in at least 200 transactions within that state. For example, Illinois’s economic nexus requires remote sellers to be liable for collecting Illinois sales and use tax if they meet the following cumulative gross receipts threshold: $100,000 or more or 200 or more separate transactions over a 12-month period.
The potential compliance challenges for businesses trying to grow their national presence include the following:
- Keeping up with different state rules: Each state has its own sales tax laws, including what triggers and constitutes economic nexus, making keeping up with all other web regulations difficult.
- Keeping up with nexus changes: Just like South Dakota v. Wayfair, Inc. overturned the Quill Corp. v. North Dakota ruling, economic nexus laws are constantly changing as states continue to find ways to get their share of remote sales.
- Multi-channel sales: Because remote sales and e-commerce occur virtually, it is difficult to determine where a sale occurs.
- Audits and penalties: States continue to enforce sales tax collection. Non-compliance can lead to financial burdens of audits, fines, and back taxes.
Due to the constant changes in laws and regulations, it is essential to stay informed of the different nexus requirements within the other states to avoid non-compliant penalties and audits. Consulting with a sales and use tax professional can ensure your business remains compliant and avoids unnecessary tax burdens.
Calvetti Ferguson Sales and Use Tax Services
Calvetti Ferguson tax advisors are ready to work with you on your sales and use tax needs. Our solutions are tailored to meet your company’s specific needs, from operations across multiple jurisdictions to complex tax scenarios. If you have questions about the information outlined above or need assistance, Calvetti Ferguson can help.