In the wake of the pandemic and with many states still behind on their budgetary responsibilities, sales tax compliance strategies have become more aggressive. This includes maintaining state-specific standards to the economic nexus rules which help each state more properly adhere to sales tax guidance in an economy that is increasingly cross-functional.
Physical vs. Economic Nexus
Most business owners and operators are probably familiar with tax compliance as it pertains to physical nexus. This is complying with the standards established by the state in which a company operates. Traditionally associated with a physical entity such as a storefront business, the physical presence of the company helps tax collection be more routine. Economic nexus requires businesses operating out of one state to comply with the sales tax standards of other states in which they might be doing business, regardless of physical presence.
Economic Nexus Thresholds
Each state maintains its economic nexus thresholds which fall into several unique categories of compliance. Some states base the economic nexus on specific dollar thresholds where a specific sales amount must be met or exceeded to qualify for compliance. Others strictly use the number of transactions. Some states use both. A recent trend, specifically in California, has been to include sale-for-resale transactions which are sales made to secure inventory with the purpose of later resale.
Each state is working to make compliance within the economic nexus qualification easier for businesses to understand and abide by. This includes state-specific websites with tools such as transaction calculators which helps non-physical entities understand what it will take to comply even before the transaction occurs.
The audit process for the economic nexus has ramped up over the past few months. State auditors have been increasingly scrutinous of e-commerce sales and digital transactions. Once a state auditor determines that additional compliance information is necessary, they will send out a questionnaire to the business seeking additional information about how transactions occur. Auditors are also looking to see if transactions are made primarily in the state of physical presence or if the majority are made outside of the state of physical presence. Those whose business operations are maintained primarily outside of the state of physical nexus are often subject to auditor review.
It is important to understand that states such as Alabama and Texas have different compliance thresholds for e-commerce sales. Other states have legislation pending that would match this new standard.
To reduce the risk of oversight and the potential of a state audit, it is important to understand the economic nexus standards of each state where a transaction might be performed. State tax collection websites will help with this. Auditors also suggest that a business that has established economic nexus do a quarterly audit of compliance specifically identifying transactions that might cross a state’s threshold.
As states begin to ensure compliance, many are attempting to create incentives for proper adherence. It is important to identify if any state-specific benefits exist once a threshold has been reached.
ACS Tax Services
The ACS Affiliate Services team works to ensure sales tax compliance of all affiliates by handling sales tax requirements of transactions. With the cooperation of account representatives and in-house financial experts, businesses are ensured compliance with state-specific standards.