From coast to coast, Washington to Florida, we are proud to celebrate a nation that is divided into fifty states, each unique and compelling in their own way. Despite being based out of Illinois, we here at Accounting Solutions Ltd. always adopt a nation-spanning perspective when it comes to providing tax information to our clients. This is due to the fact that each and every state has its own rules and subtleties regarding tax law. As you can imagine, when compounded with the fact that many of these laws are altered and amended on a regular basis, our CPA team has a lot of research to do in order to ensure that our clients receive the most accurate information and advice.
For today’s story, we wish to draw attention to the concept of economic nexus, and how it could potentially affect your small-to-medium sized business’ sales tax obligations. This information is particularly pertinent for companies that export products and services out of their home state and into others.
Before delving into too much detail – we shall start with a quick history lesson. Back in 2018, a large Supreme Court hearing took place in South Dakota. The hearing revolved around web-based companies, spearheaded by Wayfair Inc. facing legal challenges when it came to being taxed for the sale of goods that were being delivered out of their home state. The outcome and final ruling, which fundamentally altered financial laws across the country, increased the ability of a state to enforce sales tax compliance.
The reason why these powers were increased revolved around the concept of companies needing to have established a connection or ‘nexus’ with a state prior to being subject to that individual jurisdiction’s tax laws. Before South Dakota v. Wayfair, this nexus had to be established through some sort of physical means – ie, the company would need a brick and mortar office, warehouse, manufacturing facility, or store inside the state boundaries. The court ruling altered these rules, so now nexus can be established under the following conditions:
- The company in question has more than $100,000 in total products or sales being sent into the state on an annual basis.
- The company has 200 or more separate transactions revolving around the provision of services or goods to that state.
To make matters more complicated, certain regions interpret the outcome of South Dakota V. Wayfair differently. These analyses often look at thresholds in terms of transaction size. For example, certain states may not view sales that cost under $10 to be a worthy contributor towards the 200-transaction limit. Others may set the boundaries around any purchase whatsoever.
As one can imagine, these rules have big implications for companies that do business across state boundaries. In order to ensure that the proper sales tax is being applied, these organizations must take extra precautions and ensure that their accounting team or CPA is conforming to the laws. If your business lacks a physical presence, yet still delivers products and goods to a secondary state, it is crucial that you determine the economic nexus laws relating to that area. Caution is key here, as unexpected sales tax remittances can damage any organization’s bottom line. Even sales through third party marketplaces, such as Amazon or Ebay, can potentially be subject to these added fees.
Ease of transport and the power of the Internet have allowed businesses to spread their wares across the entirety of our nation, and indeed the whole world. This enhanced economic spider web is met with a wide variety of checks and balances, with nexus laws being one of the most prominent. Fortunately, our talented CPA’s have the know-how and proficiency needed to help guide any enterprise through these barricades. If you need more info regarding how nexus laws may impact your business, you know where to reach us.