Nexus Study and Analysis when it comes to Sales Tax Audits

By now you have probably heard of the new sales tax requirements following the Wayfair decision in 2018. If you are located in one state selling into another state your business may have a lingering and growing sales tax problem.  For years, your business had to be physically present in a state to be required to collect tax.  However, following Wayfair in 2018, if you exceed a sales threshold in a particular state, which is known as economic nexus, then you should be collecting and remitting sales tax.  Worse yet, if you were required and not collecting sales tax, then states can take money out of your pocket to pay for taxes you didn’t collect plus penalties and interest.

STEP 1 – Determine Where Your Business Has Nexus

For even the savviest and experienced business owner, figuring out where your company has nexus can be incredibly confusing and difficult. While certain activities like having a physical presence in a state can still trigger nexus, new economic nexus laws trigger nexus for companies who only make sales into certain states. For example, if your business makes over $100,000 of sales into Minnesota for the 12 months preceding October 1, 2019, you should have started collecting tax on October 1, 2019. If you have not, you could be liable for uncollected Minnesota tax.

Rather than trying to figure out if and where your company has nexus, you can have a sales tax professional do it for you and determine where your business has nexus whether you are located within or outside of the state Many of our competitors charge $5,000 and up just to analyze where your company may have nexus. Many companies or law firms charge by the hour and it could cost far in excess of that amount. Generally, our company can do a full economic nexus analysis for less than half of that price and can do it for a fixed fee, so you know your costs upfront.

STEP 2 – Register or Voluntary Disclosure Agreement (VDA)

If you determine your business has nexus, the primary options are to register and pay back taxes, penalty, and interest, or enter into a VDA to eliminate penalties and sometimes avoid back interest and even taxes. Unlike many of our competitors who offer a one size fits all and just blindly suggest a VDA in each state, our sales tax professionals will work with you to determine the best solution for your business.

Registration

Sometimes the best solution for a business is simply to register and pay back taxes penalties and interest. Despite what many tax professionals suggest, a VDA is simply not cost effective if the past liabilities and penalties are minimal. Why spend $3,000+ on a VDA when you are only saving $900 of penalties? It simply does not make sense in many scenarios. Of course registering and admitting to past nexus creation will often require that you file back returns and payback sales tax penalty and interest.

VDA

In many situations, voluntary disclosures can be a useful tool to cut extended periods of past exposure to shorter periods. However, in an economic nexus situation, the lookback period is often shorter than the VDA reduction. As a result, doing a VDA often turns on the potential penalty abatement against the cost of a VDA. Again, many law firms and other state tax professionals often charge $3,000 and up for a VDA, whereas our company can do it for a fraction of the cost. Like the nexus analysis, we offer fixed-fee pricing instead of the amorphous charges by the hour.

STEP 3 – Monitor Ongoing Nexus

Now that you’ve figured out which states you have nexus in and either registered in those states or entered into a VDA to deal with the past, what about the states your company does not have nexus with for the future? Our company can also provide services to help you monitor future nexus issues and keep you updated with changes in the law. Like the other services we offer fixed fees and even subscription services, so you know your costs and you know they are kept to a minimum.

Sales tax nexus can be a huge burden for a small or medium-sized business as it grows and makes sales in many states. If you are a  company that sells outside of your state, sales tax helper can help you navigate this confusing area of sales tax.

Other Resources

  • For more information on nexus click here.
  • Economic Nexus Update Click Here.
  • I received a Nexus Questionnaire?  Click Here.
  • Wayfair Creates New Tax Burdens for Online Retailers Click Here