Understanding your nexus footprint is essential when navigating sales tax compliance. Knowing where to collect and remit sales tax for your business becomes increasingly complicated in the world of sales tax nexus. So, here are some things to keep in mind when considering your nexus.
1. Educate Yourself: Understand Sales Tax Nexus
Nexus is the qualifying criteria for a seller to be required to collect and pay taxes on sales in a state. Sales tax nexus establishes the connection between a taxing jurisdiction such as a state and an establishment such as your business. However, there isn’t necessarily a shared definition of nexus across the 50 states and the rules can change, and sometimes often. Consequently, a business must look at each state individually when determining sales tax nexus and must be attentive to the continuously changing regulations.
It is important to note that there are two different types of nexus.
- Physical Nexus: The primary criteria for sales tax nexus is a physical presence in the state. This can include employees, contractors, inventory, property, and more. Formerly, states have sought to define more indirect connections – like sales representatives and solicitations – as physical nexus, but the federal government has applied limitations to this.
- Economic Nexus: Simply put, economic nexus is a business presence in a state that makes an out-of-state seller liable to collect sales tax there once a set level of revenue and transactional threshold is met. This set threshold is regulated at the state level and each state's laws and rules may vary.
2. Ensure Compliance
Oftentimes we rely on those around us to keep us on the correct path. Relying on employees and competitors to keep you compliant can be financially detrimental.
Ask your employees how they adhere to nexus changes. Ensure they monitor operations and observe any changes in your company that may impact nexus. Make certain they are educated and have the tools they need to navigate sales tax compliance.
If you have doubts, consider completing a nexus consultation.
3. Nexus Questionnaires: Proceed With Caution
In our current economy, the states are feeling the difficulty of their budget. Therefore, your state may be sending out nexus questionnaires to out-of-state businesses to help increase revenue. Tread lightly when responding to these. The wrong type of response may very well leave you subject to additional tax liabilities.
You may be wondering what you need to look out for. What exactly is a nexus questionnaire?
A nexus questionnaire is a form geared toward businesses not currently filing sales or income tax, sent by the state. They will want information concerning your out-of-state business activities so they can determine if these activities subject the company to nexus. Once you have responded, the state may want to dig a little deeper.
Before you answer the questionnaire you should not only understand what your exposure is but what options are available. Once you return that questionnaire, your options may be limited. After your response, the state may follow up with further examination or conclude that your out-of-state company has nexus and should file returns.
4. Do Not Ignore It; Be Brave
You may often hear us say this on our podcast; the most costly mistake you can make with sales tax is ignoring it.
If you have nexus do not wait for the state to find you. The longer you wait, the greater your liabilities grow as there is no statute of limitations. The second reason being; there are programs which allow for Voluntary Disclosure Agreements (VDAs) that states offer to entice you to come forward.
The VDA is a legal means for taxpayers to self-report back taxes owed for income, sales, property and other taxes.
The VDA program usually limits the period a state will look back to three to four years as well as waiving penalties and/or all or part of the interest. The drawback is that if the state finds you before you come forward, then you are usually not eligible to participate in these programs.
5. Do Not Panic
It may be tempting to quickly register once you’ve found out you have nexus. However, look before you leap and navigate this with caution.
This may seem counter-intuitive, but remember that there is no statute of limitations if you have not filed the monthly returns. Once you come forward and get registered, you’ve lost the one small advantage and leverage you had. The state now knows who you are and the state can go back and audit you for all the past periods. You will definitely want to look at a VDA or amnesty program.
If you think you might have nexus or have been contacted by a state, do not panic. Stay calm. Deep breath in, and exhale. You’ve got this.
You are not alone. You can rest assured that many before you have had the same problems and have been helped. Just remember: Do NOT ignore your sales tax compliance obligations. Not only do they not go away, they may expound with time.
6. Find the Right Sales Tax Professional
A sales tax professional is often a member of an accounting firm that focuses its practice on sales tax at the state and local level. They have often focused their career in this niche of taxation. The select focus of their practice gives them unique and unmatched expertise in getting your business compliant and saving you money. A sales tax professional can handle every sales tax problem you could face.
Oftentimes, traditional CPAs steer clear of sales tax. In most cases, they have some understanding or interest in it, but avoid taking it on as a full part of their practice due to the time it takes to stay up to speed on the continuously changing state tax laws.
As a result, many CPAs don’t have the knowledge or background in it to provide the unique sales tax services you may need. Therefore, to create the best possible outcomes for their clients, CPAs may collaborate with sales tax professionals. This better protects clients from liability and could save them hundreds of thousands of dollars from coming out of their pockets. Ensuring a sales tax specialist is involved is crucial.
That’s where we come in…
It can be overwhelming navigating sales tax and nexus on your own. It takes an expert to keep track of all of the involved complex nuances.
One thing that makes Peisner Johnson unique to the sales tax industry is our process. We start out with a free consultation called a ‘Whats Next Call’. Once you have determined we are a good fit we are with you from start to finish providing answers and guidance with all of your sales tax and nexus concerns.
As we always say, “collaboration builds confidence.” Working with a sales tax professional will help give you peace of mind and the confidence knowing that you're getting the guidance and help you need. We look forward to hearing from you!