Sales tax is one area of business where it pays to know your obligations, especially if you do business across state lines. You might get by with “ignorance is bliss” for a time, but eventually, the state will notice your activity and send the bill for any obligations you overlooked. At that point, you won’t be able to charge your customers for the sales tax. Instead, you will be the one liable for all the back tax, penalties, and interest, which can accumulate quickly.
Do You Have Nexus?
The first step in avoiding a costly sales tax mistake is to know the nexus requirements for each state in which you do business. Nexus is defined as a sufficient connection between your business and a state. If your business engages in certain activities within a state, it creates nexus—a link that makes the business liable for the state’s tax laws.
What Activities Create Nexus?
Nexus can be divided into two general types, physical and economic.
- Physical Nexus. Your business has physical ties to a state by doing activities such as:
- Storing inventory in that state (including FBA from Amazon)
- Having an employee or independent contractor located in the state
- Providing services or repairs, or making deliveries to the state
- Economic Nexus. Your business crosses the state’s minimum threshold for sales by reaching:
- A minimum dollar amount of sales within the state in one year (including online sales), or
- A minimum number of sales transactions within the state in one year (including online sales)
Pro Tip: A recent US Supreme Court case addressed the issue of online sales to customers in other states. The ruling now requires businesses to count these online sales towards nexus in each customer’s state. See South Dakota v. Wayfair.
Next Steps If You Have Nexus
If your business has established nexus in a state, you are responsible for collecting and remitting the sales tax in that state. The process can be overwhelming since each state has different requirements, and they are constantly changing.
The easiest solution is to work with an accountant who can help you with the following steps for making sure your
business is in compliance:
- Research what items and services are taxable in that state
- Register for sales tax with the state
- Determine the tax rate to collect for each jurisdiction (state, county, and local)
- Collect and remit sales tax
- Keep up with the changing laws and regulations
Need Help with Sales Tax?
At Gehman Accounting, we are prepared to help you with your sales tax needs. We are excited to announce that we are launching new sales tax service options. Go to gehmanaccounting.com/sales-tax-services or call us at 717.354.8288 to learn more about the expert services available.
