Which States Want A Slice Of Your Sales Tax Pie?
Since the United States Supreme Court ruled on the landmark South Dakota v. Wayfair case in 2018, nearly every state in America has taken steps to adopt new economic nexus rules. Now, businesses that conduct sales outside of their home state are at risk of being contacted by other states looking for a slice of their sales tax pie.
What Is Economic Nexus & Why Does It Matter?
Businesses that are deemed to have economic nexus are those that have hit or exceeded thresholds related to gross sales or the number of transactions in a particular state. If these thresholds (which can vary by state) are hit or exceeded in states with economic nexus rules, the business is then required to register with the state in question. What this ultimately means is that, by doing business in states with economic nexus rules, you may now have certain tax implications.
Most states have adopted rules that say if a business has gross sales of $100,000 or more or 200 transactions (i.e. shipments) into the state, they may have a legal obligation to register for and start collecting sales tax on all taxable sales going forward. While economic nexus rules mostly have sales tax implications, triggering economic nexus can result in other tax liabilities for the business as well, including gross receipts taxes or income and franchise taxes.
In the world of state and local taxes, economic nexus has become the new normal and, due to dwindling state budgets, states are ramping up their efforts to crack down on companies that are doing business within these out-of-state jurisdictions. Not only does this mean that your company could be on the hook for additional tax payments just for doing business across state lines, it means that penalties and fines could be in your future for failing to register your business in these other states or failing to collect the appropriate exemption certificates.
Economic Nexus Hits Close To Home
It’s common to hear a worst-case scenario and think that it could never happen to you. Similarly, it’s easy for smaller companies or businesses in small communities to brush off economic nexus liabilities because they believe it’s unlikely an out-of-state taxing authority would come looking to collect tax dollars from them if there are bigger fish to fry. Unfortunately, this train of thought is not only flawed, but it can also have serious financial consequences.
Not too long ago, our state and local tax team was contacted by a furniture manufacturer and retailer based out of Millersburg, Ohio. Not only had the company realized exponential sales growth over the years, but much of its growth could also be attributed to out-of-state tourists visiting Ohio’s Amish Country while on vacation. These travelers would visit the store, place their orders, and then have those orders shipped (by the company) to their homes outside Ohio. Because the owner of this business had just read about the South Dakota v. Wayfair case, they became curious about their economic nexus liability and decided it was a good idea to get ahead of the curve in an attempt to avoid back taxes and penalties.
The Rea team set to work researching which states, based on gross sales and transactions, the Millersburg-based company likely met the economic nexus thresholds. After conducting a thorough audit of the company’s transactions, it was revealed that the local company had triggered economic nexus in several states, including Michigan, Pennsylvania, and West Virginia, beginning in 2018, when some of the first-adopter states implemented their rules. Fortunately, because of their proactive stance on the matter, the company was able to set a statute of limitations on the states’ abilities to send sales tax notices and thus prevent the states in question from coming after the company for earlier years. Additionally, by taking action early on, the company has protected itself from having to pay even more to the states of Michigan, Pennsylvania, and West Virginia in the form of interest and penalties, which would have been the case if they had just sat back and allowed the states to catch them on their own.
Listen to episode 275, “Ohio’s State & Local Tax Update,” on unsuitable on Rea Radio, Rea & Associates’ award-winning weekly accounting and business consulting podcast.
These new economic nexus laws may seem intimidating, overly complicated, and the penalties for failing to comply may be high – but you don’t have to tackle this project alone. As a full-service CPA and business consulting firm, Rea & Associates has the expertise and experience necessary to help protect your business from complex financial concerns. Additionally, our state and local tax specialists are able to help you determine where your liabilities are while identifying your best course of action. Contact Rea & Associates to learn more about economic nexus and whether your business might have out-of-state tax liabilities.
By Sarah Sparks, EA, CP (Dublin CPA Firm)