Ever since the Supreme Court released its decision in South Dakota v. Wayfair on June 21, 2018, economic nexus has been a popular subject for all businesses. Sales tax economic nexus generally requires an out-of-state seller to collect and remit sales tax once the seller meets a threshold of sales transactions or gross receipts activity within the state. No physical presence is required for filing and collection requirements.
Every State Has Sales Tax Laws
Since 2018, every state that has sales tax written into law has set economic nexus thresholds. Missouri and Florida have now set economic sales tax thresholds. This is very important to note since a company may only have a physical presence in one state but needs to file and collect sales tax in multiple states if they have met the thresholds.
Review Your Sales by State
It is important to review your company’s sales by state, both in revenue totals and transaction amounts, to determine if there may be a filing and collection requirement for sales tax in other states. Most states review on a calendar basis, but some are a rolling 12 months or rolling four quarters. For example, in a state that is calendar year based, you will review the prior years (depending on when a state implemented their economic nexus) and current year sales to determine if the sales thresholds have been reached. If a threshold was hit, then the start date needs to be determined. If the current year was the first year to hit the threshold, then the next sale after the threshold was met in the state is taxable. If the threshold was hit in a prior year (after that state’s implementation date), then the next sale after that date is taxable. This may mean that there is past exposure and tax due on items that may not have been charged tax.
Past Exposure Notices
Now that it has been several years since the decision was made in 2018 and all states getting on board with their own economic nexus laws, we are beginning to see nexus questionnaires and notices coming out regarding this. Past exposure, as mentioned above, may be determined through a questionnaire or notice. Tax, penalty, and interest may be due on this exposure and could go back to 2018. It is also important to review if you have other nexus-creating activities in a state like employees, independent contractors, or providing services.
Perform a Nexus Review
If a nexus review has been performed to determine past exposure prior to a state contacting you, it is easier to take advantage of things like a voluntary disclosure agreement in order to avoid penalties associated with the exposure. A VDA (voluntary disclosure agreement) is a way to approach the state anonymously and let them know of past tax exposure. If the state accepts, you must file and pay the back taxes due along with interest charged, but usually the penalty is waived.
DHJJ State and Local Tax
Knowing your filing and collection requirements and of any past exposure is crucial for a business. DHJJ’s State and Local Tax group can review client sales and determine filing requirements.