Like we’ve said before, Wayfair changed the landscape of state sales tax compliance.
The 2018 Wayfair vs. South Dakota Supreme Court Case decision ruled that states have the right to force out-of-state sellers to collect and remit sales tax, even if they do not have a physical presence in the taxing state.
Wayfair established South Dakota’s “economic nexus” legislation nationwide, which dictates that sellers are liable for the collection of sales and use tax if they meet or exceed a state’s economic threshold. Companies reach this threshold if they sell a certain amount of personal or electronic property into the state in a given year or make a certain number of transactions per year in the state.
To get compliant, you first need to look into where you could possibly have nexus. So, before we cover the incentives, let’s get into what nexus means.
Nexus, also known as sufficient physical presence, is a legal term that refers to the requirement for companies doing business in a state to pay tax in that state. Nexus is basically a connection between the taxing authority and the business that must collect or pay the tax. There are two types of nexus businesses need to be aware of – economic nexus and physical nexus.
Before Wayfair vs. South Dakota, physical nexus was the only nexus companies had to worry about. Businesses only had to collect and remit sales tax in states where they had a physical presence, but now, that is no longer the only requirement.
Over the past few years, legislation has finally caught up to the world of eCommerce. Now, if your business sells products or services online in a state, that could establish economic nexus if you meet that state’s transaction or revenue threshold.
Understanding sales tax nexus and corresponding liability is vital for business owners. By complying with the states in which you have nexus, you can avoid paying uncollected taxes plus fines and interest.
The worst-case scenario is you could be audited before you knew you had a responsibility to collect and remit sales tax in a state. To compound the problem, you might have had nexus in that state for years and not known about it. Unfortunately, in that case, you may end up having to pay past-due sales tax out of your own pocket with interest and penalties.
In short, the cost of compliance is less than the cost of non-compliance. Penalties on late sales tax remittance is margin-killing for a lot of companies. If you can avoid paying those unnecessary penalties, you absolutely should. Down the road, the amount of money you save by complying with states where you have nexus far outweighs the penalties and interest you could accrue. That can make a big difference in the success of your company.
The good news here is that states want you to get compliant. A lot of states have voluntary disclosure programs where you can enter anonymously into a Voluntary Disclosure Agreement (VDA) with the state. Under this agreement, the state agrees to limit the scope on how far back they’ll look for unpaid tax, and reduce or eliminate your penalties and interest.
The good news is once you are compliant, a lot of states have incentives for good filing behavior.
Over half of the states with sales tax offer on-time sales tax filing incentives. When you’re filing monthly returns, those small discounts can add up.
For example, Texas has a .5% discount for timely filing, and on top of that, you can get an additional 1.25% discount when you elect to prepay next month’s tax. It doesn’t seem like much, but trust us, when you file in multiple states monthly, those small percentages add up quickly.
In general, a timely filing means that you pay your sales tax on or before the due date each month (often the 20th). If you want to qualify for the prepay discount, you will need to file and pay earlier in the month.
If you are a quarterly filer, the same principles apply. For example, for the first quarter of the year, the quarterly sales tax report and payment would need to be made on or before the due date in April, and the prepayment date would be earlier in the quarter. Prepayment amounts are typically calculated by using the previous month or year’s remittance.
Be sure to check out the resources on each state’s site to see if you can take advantage of any on-time filing incentives.
Filing state sales tax can be confusing, and not everyone has time to read and understand the fine print. Letting an expert handle your compliance issues and returns will provide you with reassurance and will save you time and money in the long run.
Let our experts handle your state sales tax work. We can help you stay ahead of the game with timely and pre-paid filing. Peace of mind is a ‘What’s Next’ call away.