On June 21, 2018, the Supreme Court of the United States issued an opinion in the case South Dakota v. Wayfair, Inc, which led to a tidal wave of states imposing sales tax on remote sellers. Today, nearly all new sales tax requirements hinge on the concept of nexus.
Sales tax nexus is the connection between a seller and a state that requires the seller to register, then collect and remit sales tax in the state. Certain business activities, including having a physical presence or reaching a certain sales threshold, may establish nexus within a state. Since the Wayfair opinion was issued, 45 states, parts of Alaska, and the District of Columbia have adopted economic nexus laws, and small businesses are running into more nexus obligations as they expand into new channels and locations.
Recent data from Avalara’s Wayfair Decision Tracking Study shows that businesses are increasingly running into nexus obligations in more states. 54% of businesses started selling into six or more states within the last year — a number that is not surprising given the exponential growth of ecommerce and greater adoption of omnichannel strategies.
Knowing where you have nexus is crucial for small businesses, especially as they expand their footprint into new states. At the same time, nexus rules aren’t one-and-done. It continues to change with new laws, requiring constant state-by-state research to ensure compliance. While it can take a lot of time and effort to make sure businesses are getting nexus right, the consequences of noncompliance can cost even more time and money — critical resources for a growing business.
There are several ways a business can trigger sales tax nexus, including:
- Economic nexus, which is triggered by reaching a certain amount of sales and/or a number of sales transactions in a state.
- Physical nexus creates an obligation to collect and remit sales tax within the state where a company has a physical presence, and also includes renting or owning property, employing remote workers, even storing property in a fulfillment center or location owned by someone else.
- Under affiliate nexus laws, an out-of-state business establishes a physical connection through in-state affiliates, employees, representatives, or other entities. For there to be affiliate nexus, there needs to be a relationship between the entities — but the nature of the relationship varies a great deal from state to state.
- Click-through nexus laws occur when an out-of-state business establishes a physical connection to a state through agreements to reward persons in the state for directly or indirectly referring potential purchasers through links on a website, or otherwise.
Simplifying sales tax nexus
For small businesses, simplifying the process of sales tax compliance starts with identifying where your nexus is. Establishing a sales tax collection system across all your businesses’ channels — from brick-and-mortar stores to the online shopping experience will help ease the complexity of compliance while also delivering a more accurate and seamless checkout experience for customers. While this task may be simple for some companies with greater resources and large swaths of employees, the research, computations, filing, and reporting required for sales tax compliance are time-consuming, expensive, and error-prone within the small business community. In today’s landscape, the best option for small businesses to stay tax compliant is to establish a centralized, automated tax engine fully integrated with the company’s ecommerce, Enterprise Resource Planning (ERP), point-of-sale, or other business management system.
As Avalara’s Wayfair Decision Tracking Study shows, more businesses are turning to technology to improve compliance. 60% of businesses are using an automated solution to manage Wayfair laws. The rise in the adoption of automation signals that more businesses are realizing that tax is simply too complex to manage on their own.
Understanding nexus obligations, registrations, returns, tax-exempt sales, and more all impact how compliant a business is, so automation that streamlines that entire journey is necessary to help businesses reach a greater level of compliance. If your company is growing or planning to grow, your sales tax obligations will likely grow too. Treating sales tax compliance as important as other business functions will help ensure you don’t run into any roadblocks as you scale.
Liz Armbruester is the SVP of global compliance at Avalara.
Sales tax stock image by Africa Studio/Shutterstock