Sales tax compliance in the US is a complex and ever-changing landscape, with different rules, rates, and regulations across states, counties, and even municipalities. Businesses that sell across state lines must navigate this maze of requirements to stay compliant and avoid costly penalties.
To make sense of this intricate and important subject, we sat down with Alexandra Lyons, a Sales Executive with Avalara. Avalara is a leading provider of cloud-based tax compliance solutions. They help businesses of all sizes to remain tax compliant; their solutions support businesses in improving accuracy, reducing potential costs, and avoiding penalties. We spoke about physical and economic nexus, about how to avoid penalties, how the landscape has changed, and about the free of charge tax assessment Avalara is offering rkl customers.
What are the trends we should be aware of?
Digital Revenue hit 251 billion dollars in the third quarter. Over 20 billion of all dollars spent on retail purchases last year resulted from online orders. According to the international monetary fund, Global growth is forecast to be reduced from six percent in 2021 to 3.2 percent in 2022 and 2.7 in 2023.
Have there been any changes to the tax laws, specifically to the Economic Nexus due to the 2018 Federal Supreme Court ruling Wayfair versus South Dakota?
I have been working in the Sage world at Avalara prior to South Dakota versus Wayfair, and despite the years that have elapsed we are still discussing this case because it has been so crucial and has so many implications. There are 45 states where sales tax is mandatory, in addition to the 45 States there is also DC and Puerto Rico that have enacted economic Nexus laws in the last few years. Missouri is launching their economic Nexus, and we are constantly witnessing changes and thus we can predict more changes to come. It is an extremely dynamic reality which means understanding how all the new legislation affects a business as well as that fact that staying tax compliant is complex.
What are the tax changes and activities that could trigger a physical Nexus?
There is misconception that Physical Nexus is merely where a company is physically located, where an office is located, but this is not accurate. Different states have started to change physical nexus definition, requiring businesses that are selling across state lines to deal with sales tax in their state. Trade shows they attend, for instance, is something that many people are unaware of, and it can create a physical nexus. If a business has employees working from a remote location, that may impact physical nexus. Sales visits can serve as an example. If a representative is visiting clients for sales purposes, or for the purpose of installing something, this might create a physical nexus. Anything that puts a person from a business on behalf of that business across a state line, may result in physical nexus.
What are the different thresholds for physical nexus?
Different states have different thresholds, and unfortunately nothing is simple. Many states have a dollar amount threshold. For example, California and Texas have their thresholds at $500,000 in sales, other states have smaller dollar thresholds but may also include a transactional threshold. For instance, a state may have a number of 100 or 200 transactions as their threshold. Some states may have a dollar amount threshold or 200 transactions which means it may impact a business selling a product that has a lower dollar value but sells a large amount. That business will encounter nexus quickly and would need to register. Again, it is important to emphasize that every state has different nexus laws.
Another common misconception is that these only impact retail sales. This inaccurately also applies to manufacturers and distributors. Every state is different, which makes it extremely intricate and complex to understand, and for that reason we have created a page on our site called Avalara Economic Nexus that allows businesses to learn the requirement state by state. In addition, we created a risk assessment which you can complete online, answer questions, and generate a quick report in order to give you an idea whether you are close to economic nexus in a certain state. It gives you the opportunity to prepare as a business. Avalara can provide a tax advisor to talk you through the report and answer any questions you may have.
Are there additional trends we should be aware of?
Numerous businesses are launching e-commerce sites, whether they are retailers or manufacturers etc., and this means that they need to reassess how they manage their tax compliance. For any business considering this move, I would truly recommend having a conversation with a sales tax expert, together with your tax accountant, in order to uncover the possible repercussions and what steps you should take to ensure you are well prepared and will remain tax compliant. When you are well prepared you know whether you need to be registered and where; it means you know exactly how much sales tax to charge, and you will know in which cases you should be managing tax exemptions. Obtaining accurate information is key to this complex subject. Thus, conducting a proper tax assessment is extremely beneficial and allows a business to take the right steps to stay on track.
What are examples for physical nexus activities?
If you have any planned trade shows, on-site installations and any activity that puts an employee in a different state, these can all create a physical nexus. The earlier you are aware of this fact, the better prepared you are.
It is amazing that Avalara is willing to provide this tax assessment for free!
We are able to give this assessment free of charge for this period because we have this information automated, which means we only need to compare it with a company’s data. Unlike an accounting firm, for instance, that does all this manually, we have the information automated and would like to offer this assessment for a period, free of charge, to RKL customers. Avalara will offer this assessment free of charge to RKL customers for the remainder of 2023.
Can Avalara help businesses reduce penalties or fines that may have occurred due to non-compliance?
Absolutely. Avalara as well as many accounting firms it able to do this. Through the Nexus study or risk assessment which often is the first of many steps that must be taken to get a business back on the path to becoming tax compliant. Risk assessment identifies where a business needs to be registered, and where it does not. Usually, the next step is examining the physical Nexus law in each of the states in which the business operates in order to determine whether there is any tax liability. Avalara helps by recommending how to set up in that specific state. In certain cases, a company may have what is referred to as ‘excessive liability’ and then the procedure is called voluntary disclosure. Each state offers a program called ‘voluntary disclosure’ which is an amnesty program that allows you to enter the state anonymously. Avalara can help companies do this which guarantees penalty and interest abatement. Penalties on liability can range from 20 to 50 percent depending on the state, which can become very costly. In addition, the states often limit the look back period, so rather than a seven-year period, it may limit the look back period to two or three years, which helps from a tax liability perspective. Furthermore, there are the payment terms which can be worked out between the state and the business. There are many advantages in entering through the voluntary disclosure program, however, to do so, a business must know if it actually needs it, which is precisely why we recommend conducting the risk assessment.
There's still time to complete Avalara’s tax assessment. If you have any further questions, please reach out to us or your customer success manager, we would love to hear from you and provide all the information you need.