Posted on October 19, 2020
The COVID-19 pandemic has been and will be remembered as one of the most impactful global events of our era. An unprecedented challenge was thrust upon the medical, government, and business community that will clearly change many of the behaviors of our society in the long run.
As businesses worked quickly to adapt, one of the last issues many of them considered was compliance with state and local sales tax.
In Part 1 of this article, we talked about how remote workers can create sales tax collection obligations for businesses through traditional nexus. In Part 2, we discuss the impact of economic nexus due to growth in internet and remote sales.
Mistake #2 - If your remote employees didn’t create nexus, your remote sales boost / pivot did
Did the discussion on traditional nexus exhaust you in Part 1? If not, then allow me to introduce “economic nexus”. In Part 1, I mentioned July of 2018 and $100,000 in sales. This is where that comes into play.
In July of 2018 the era of physical presence being the chief law of the land came to an end when the landmark SCOTUS decision in South Dakota v. Wayfair, Inc. set the precedent that economic nexus, even in the absence of physical presence, could be considered sufficient. It did not replace the physical presence standard, but became a new standard in addition to it, vastly expanding the reach of state taxing authorities. South Dakota’s law considered sufficient economic nexus to be $100,000 in sales and/or 200 separate transactions.
Immediately states with a sales tax began adopting economic nexus laws, and now all but 2 states (and the District of Columbia) with a statewide sales tax have such laws in effect today. Most states you encounter have played it safe by adopting South Dakota’s exact threshold parameters, while others have taken playing it safe a step further by instituting higher thresholds, requiring both thresholds to be met, or eliminating the transaction parameters altogether. Few states have instituted more aggressive thresholds, and the Kansas Department of Revenue has been widely criticized for enacting rules without any small business safe harbor thresholds at all, even though no official economic nexus laws have been passed. Despite condemnation by the Kansas Attorney General himself, the Kansas DOR has stated they intend to enforce tax collection on all taxable sales into Kansas until intervened by courts or legislature.
E-commerce has increased tremendously in the last few months as people have turned to remote sellers; not just for convenience but for the safety of the transactions as they maximize social distancing. If your business has reached a certain level of economic activity delivered into most US states and the District of Columbia, then you have likely triggered sales tax obligations. This will not have the same potential for flexibility as nexus triggered by remote employees. States will impose tax collection and remittance responsibilities on you regardless of the pandemic circumstances.
Another factor that concerns me regarding economic nexus this year is timing. We just passed the two-year anniversary of the Wayfair decision. States have been slower to engage in sweeping enforcement than we expected, but I believe that honeymoon to be over. States are suffering from unprecedented drops in revenue due to tax deferments and economic stagnation in this time of crisis, which has also brought on increased public service costs. States will need to make up that revenue and then some, and I believe they will do it through broader enforcement of economic nexus, ramping up audits, and encouraging legislators to expand the tax base (particularly through taxations of digital goods and services). Do not let your business end up as one of those on the chopping block, take this warning seriously!
It is very simple to get a high-level understanding of your potential for economic nexus. Go to Allyn’s website and use our State by State Wayfair & Economic Nexus Reference Map. It gives details on each state’s thresholds, critical details on such thresholds, enforcement dates, and more. You can even download the chart, as have many of our clients, competitors, and more, to use as reference. Ultimately, I recommend getting with a sales tax expert if you have substantial remote sales to analyze. There are nuances that will both increase and decrease your risk of nexus that an expert can take advantage of or help you avoid. They will also know the right course of action such as proactive registration or the preparation of a voluntary disclosure agreement. A reliable consultant will ensure their services create value for your business through increased compliance, tax savings, or audit risk minimized.
Tips for the Taxpayer
Start immediately on a thorough nexus review for all nexus types across the states. Your earliest point of nexus is the day your tax liabilities began, and though this article has been specific to COVID-19 actions, nexus can go all the way back to the inception of your business with certain triggers.
Conduct a thorough analysis of your sales by state to identify where you may have economic nexus. Like traditional nexus, it can go back prior to COVID-19 but will not likely go past the 2018 Wayfair decision.
Additionally, do not neglect to conduct a survey of your employees to find out where they have been remotely working through the pandemic and when they started in those locations. Ensure your employees know to keep you notified of such moves, and in certain cases you may want to restrict employees from working remote in certain problem states. We discussed this issue at length in Part 1.
All the above have nuances and exceptions. Consult with a state tax expert, it will be the most effective and economical decision in the long run.
How Can We Help?
Allyn International has been helping businesses with their tax issues for over 25 years and is led by experienced professionals whose sales tax knowledge goes well beyond that. Allyn regularly conducts nexus reviews as a part of our end-to-end sales tax compliance services or as one-off consulting projects. When we say end-to-end services, we mean we will work with your data in its least prepared form and take actions far beyond the point of our competitors. Our mission statement calls for us to enable you to succeed by allowing you to focus on your core business. With Allyn on your side, you will not have sales tax lingering in the back of your mind. We have been providing that peace of mind in all aspects of Federal, state, and local tax compliance and consulting for large US and global corporations since our inception.
Allyn is also happy to announce this year we upgraded our existing ECM software solution and are introducing CERTlocker, the ECM software for professionals by professionals. While we recommend you engage us to apply our end-to-end incomparable ECM services to your operations while we leverage the technology, CERTlocker is available for licensing as well.
At Allyn we have seen significant success in defending exempt sales for our clients under audit when we have been managing their exemption certificates for years prior. This allows Allyn to focus our energies to further audit savings opportunities at a lower total cost of compliance to the taxpayer.
Trust that with Allyn on your side you will pay your fair share in taxes but not a penny more. Contact us and we can provide a customized cost-effective solution to meet your company’s needs. For further information on Allyn Tax services, please contact: email@example.com.
For More Information
If you are interested in learning more about this topic or other tax topics, please visit our Tax Publications under News and Events at www.allynintl.com.
Contributor: Jordan Perri
About Allyn International
Allyn International is dedicated to providing high quality, customer centric services and solutions for the global marketplace. Allyn's core products include transportation management, logistics sourcing, freight forwarding, supply chain consulting, tax management and global trade compliance. Allyn clients range from small local businesses to Fortune 500 firms. Allyn conducts business in more than 20 languages and has extensive experience in both developed and emerging markets. Highly trained experts are positioned throughout North America, Europe and Asia and Allyn regional headquarters are strategically located in Fort Myers FL USA, Shanghai P.R. CHINA and Prague, CZECH REPUBLIC. For more information, log on to www.allynintl.com.