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New Sales Tax Rules Affect Certain Small Businesses Across the U.S.

A new sales tax rule is being enacted in over half the states in the nation. This brief guide explains the basics of economic nexus laws, provides resources to help keep your company compliant and considers how the law may benefit local businesses.

From Manta
By Kitty French, Manta Contributor – December 1, 2018

Just when you thought business taxes couldn’t get more complicated, an increasing number of states are implementing new sales and use tax laws for remote sellers. Under new economic nexus laws, if your company sells goods and services online or does substantial business in states with economic nexus laws on the books, you may be responsible for charging sales taxes based on your activity.

What is economic nexus?

Economic nexus imposes a sales tax collection requirement on remote businesses with significant sales, but no physical presence, in the state. These remote sellers are often online retailers or ecommerce companies doing business in states that have recently passed legislation taxing sales by out-of-state companies.

What triggered these new tax laws?

Though the new sales tax laws may come as a surprise to some business owners, economic nexus has been brewing for years as states have sought to capture sales tax revenue from ever-increasing ecommerce sales. In June 2018, in its ruling in South Dakota v. Wayfair, Inc., the Supreme Court of the United States overturned a long-standing precedent that only businesses with a physical presence in a state were obligated to collect and remit state sales tax.

“Now economic activity in a state — economic nexus — can trigger a sales tax collection obligation. Economic nexus is based entirely on sales revenue, transaction volume or a combination of both,” according to analysis of the new economic nexus laws by Avalara, a tax compliance software and services provider.

Leveling the playing field for local retailers

On the plus side, economic nexus may actually level the playing field for small businesses. Many internet-based retailers have been able to avoid charging the state and local sales taxes that local retailers in each individual state with sales tax laws are required to collect and submit — until this ruling.

In its Wayfair decision, the Supreme Court reversed the sales tax precedent upheld in the 1992 decision in Quill Corp. v. North Dakota. The Quill decision required physical presence as a condition for charging sales tax in a given state. In Wayfair, South Dakota argued that the physical presence requirement provided an unfair advantage to ecommerce businesses with significant sales but not physical presence in the state.

Prior to the Wayfair decision, Internet-based sales companies were able to access state markets across the nation without meeting the same sales tax obligations with which local sellers were obligated to comply. This advantage has become more pronounced as ecommerce retailers gained market share over a state’s smaller local retailers.

“The Internet’s prevalence and power have changed the dynamics of the national economy. In 1992, mail-order sales in the United States totaled $180 billion,” wrote Justice Anthony Kennedy in the Wayfair decision. “Last year, e-commerce retail sales alone were estimated at $453.5 billion.”

If your company makes online sales across the country, it will benefit you to be proactive in planning how you will meet expanding sales tax obligations under new state economic nexus laws.

 Does my company need to collect and remit sales tax under state economic nexus laws?

By early 2019, almost 30  states will require remote sellers to collect and remit sales tax. To date, these states include:

Alabama
Colorado
Connecticut
Georgia
Hawaii
Illinois
Indiana
Iowa
Kentucky
Louisiana
Maine
Maryland
Michigan
Minnesota
Mississippi
Nebraska
Nevada
New Jersey
North Carolina
North Dakota
South Carolina
South Dakota
Tennessee
Utah
Vermont
Washington
West Virginia
Wisconsin
Wyoming

Does my business meet the economic nexus sales tax thresholds?

Economic nexus laws don’t only affect large internet retailers. Many states sales tax economic nexus policies have a threshold of 200 transactions or $100,000 in sales in the current or previous calendar year. That means they can apply to many small to medium-sized businesses.

Staying on top of your company’s sales tax obligations under expanding state economic nexus policies is a massive undertaking, given that each state has its own laws and tax remittance procedures. Online retailers and remote sales companies doing business in any of these states should research their tax obligations under the new laws. Click herefor Avalara’s complete list of economic nexus states and their sales thresholds.

How to manage sales tax

The penalties — and the headaches — are too great to make a mistake when it comes to calculating your sales tax obligations under economic nexus policies in multiple states. As is often the solution for busy small business owners, it’s a good idea to seek out products and services that help you delegate or automate your sales tax filing.

Automated tax solution providers like Avalara provide a suite of products that can make managing your tax obligation a breeze. For example, if your company is obligated to collect and remit sales taxes in multiple states, Avalara’s programs can help you determine the states in which your company is obligated to charge taxes. From there, you can register automatically in each state. Avalara provides business bookkeepers with the correct forms and automates filings so that all of the applicable deadlines are met.

If you don’t have the resources to hire a full-time controller or an accounting firm, software suites like Avalara’s can help you keep your business compliant.