At SUMO Heavy, we’ve implemented Avalara for a number of merchants that have experienced significant growth in the past couple of years. As merchants grow, their sales increase in locations that expose them to economic Nexus in locations where they previously had not been forced to collect Sales Tax. In these cases, implementing a tax service can be a great option to manage tax liability.
Any merchant who is selling online, and receiving more than a few hundred orders can be exposed to some of these liabilities. Once you know that you have Nexus outside your home state, it can be worth looking into tax collection services to help you manage your liabilities.
What is Nexus anyway?
In June of 2018 there was a Supreme court case between South Dakota and Wayfair (South Dakota v. Wayfair) that concerned States passing laws that would require eCommerce companies to collect Sales Tax, even if they didn’t have physical nexus in a State. Nexus, in a sales tax connotation, means that you have a liability to collect sales tax in a location. If you have Nexus in New Jersey, that means you have to collect sales tax in New Jersey.
Before the Wayfair ruling, a merchant was only required to collect Sales tax in a state where they had physical nexus. Traditionally, physical nexus was established by having a physical location like a warehouse or office in a State. For example, if I set up shop and I’m based in New Jersey, I should be collecting sales tax on any of the purchases that are shipped somewhere in New Jersey. However, States slowly started to expand their definition of Nexus. Say your internet server was located in California – that constituted having a Nexus in California, or maybe you opened up a warehouse in Iowa that would expose you to Nexus in Iowa.
Following the Supreme Court case in 2018, the Court ruled that states were allowed to tax Merchants on the new basis of economic nexus, without requiring a business to have a physical location in a state. These are called economic Nexus laws. They become difficult for businesses to manage, because they require understanding the collection thresholds in each State individually.
Let’s use Pennsylvania as an example: Pennsylvania has a sales threshold of $100,000 in sales. Once you meet this threshold, you’re required to collect sales tax in Pennsylvania for that entire year. States have been left up to their own devices to set those economic thresholds to whatever they want them to be. Economic nexus laws have led to a lot of confusion for merchants, many don’t even know that they have to collect sales tax in some jurisdictions!
Merchants Need to Be Aware of the Risks and Penalties
A lot of smaller merchants just plainly aren’t aware of the new rules. The other issue is that it’s really hard to report on it properly unless you’re set up to do it in advance. Many businesses aren’t looking at their state by state sales and what requirements these States have for sales tax unless they’re actually operating in a state.
The penalties for being audited and being found to owe back taxes vary by location. If a merchant is found to owe back taxes, a State will often assess the Merchant with penalties and interest, on top of the back taxes owed. Oftentimes this can be very expensive because the interest begins calculating from the period in which you were supposed to start collecting. Like any other tax issue, States have the power to levy your business and enforce liens as well if you don’t pay them in a timely manner.
Tax Collection Solutions Ease the Burden
As a Merchant begins to expand their tax liability, collecting and remitting tax becomes exponentially more complicated. Many Merchants are starting to implement integrations with tax services such as Avalara, Tax Jar, Taxify, and others. Normally, these integrations are fairly straightforward and use the service’s API’s to collect the correct rates and assess them to the Customer at Checkout. As multiple states have a separate state sales tax rate, county tax rate, and local tax rate, an integration like Avalara can make the collection and remittance of taxes simplified.
These Tax integrations can also help a Merchant file their returns correctly. They can automate the filing process so that a Merchant doesn’t have to file Returns in that location manually. As Returns schedules can be monthly, quarterly, or yearly, depending on the location, these services can offset a lot of manual workloads.
The Solution is Better Than an Audit
While these services aren’t inexpensive, they can save a Merchant a lot of expense in the long run by:
- Automating the collection of Sales Tax
- Automating the filing of Returns
- Offsetting some of the liability that Merchants could face in processing these manually
- Decreasing the likelihood of an Audit
Merchants that deal with a lot of Tax-Exempt sales have additional complexities to keep in mind. These merchants should ensure that they have Resale Certificates on file for all of the Companies that they sell to because a lot of these tax solutions will require Resale information to exempt the customer from sales. You can get around it, but if you get audited, you’re going to need that information anyway. Merchants should ensure they’re keeping Tax Exempt information accurate and up to date!
Merchants should be aware of the changing Nexus requirements and how they can affect your business. Avalara has a great resource that explains the requirements across the United States. The most important thing is to understand where you have potential liabilities and to determine whether a Tax Service can help you streamline your processes. Most of the major providers have integrations with the most popular eCommerce platforms.
I’d also suggest that you routinely monitor your sales in each of these locations that have Economic Nexus Laws. If your company is experiencing strong growth from year to year, there’s a significant chance that these Economic Nexus laws will come into play.