Navigating the Complexities of Sales Tax Compliance Across Multiple States

With e-commerce blurring the lines between physical and digital businesses, reaching customers in different states has never been easier. But there's a catch: the challenge of managing sales tax compliance across multiple states. Due to the "economic nexus" standards—such as those set by the Wayfair ruling—companies now have the added task of collecting and remitting sales tax in locations within which they do not have a physical presence. This guide explains the concept of economic nexus, details common sales tax mistakes, and offers practical tools for compliance.

What Is Economic Nexus and How Does It Impact Your Business?

Economic nexus, also known as sales tax nexus, refers to the legal requirement for businesses to collect and pay sales tax in states where they meet specific sales or transaction thresholds. These companies must pay such taxes even if they don't have a physical presence in these states. This idea gained traction after the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., which allowed states to require sales tax collection from out-of-state sellers based solely on their economic activity.

Understanding the Wayfair Ruling and Economic Nexus Thresholds

Before 2018, the rule was simple. You only had to collect sales tax in states where you had a physical presence, whether that presence be a store, office, or warehouse. The Wayfair ruling changed everything. Now, if your company hits certain thresholds in a state, you're on the hook for sales tax. For example, South Dakota's law requires you to collect sales tax if you have:

200 or more transactions in the state during the previous year, or
Sales totaling $100,000 or more during the previous year.

Many other states have adopted similar thresholds, though they can vary slightly. For example, New York has a threshold of $500,000 and 100 or more sales transactions, while Mississippi has a threshold of $250,000 and no minimum sales transactions. That's why knowing the sales tax thresholds in every state where you do business is crucial.

What Are Common Mistakes in Multi-State Sales Tax Compliance?

With multiple states, varying thresholds, and constantly changing laws, it's easy for entrepreneurs to make mistakes. Unfortunately, noncompliance can lead to hefty penalties, audits, and damage to your reputation. Let's look at a few mistakes that can lead to penalties.

Ignoring Economic Nexus Triggers

A common mistake entrepreneurs make is not monitoring their sales or transaction volumes. Many small businesses wrongly assume that the economic nexus only applies to larger companies. However, if you sell high-demand products, you might easily cross a state's threshold.

Incorrectly Calculating Sales Tax

Sales tax rates differ by state, county, and city. Miscalculating the sales tax due can result in undercharging or overcharging customers. Undercharging leaves you responsible for back taxes, while overcharging can irritate customers and harm your reputation.

Failing to Register in States Where You Have a Nexus

Once you hit a state's economic nexus threshold, you must register for a sales tax permit before legally collecting sales tax. Not registering can result in fines or audits, so stay ahead of these requirements.

Sales tax regulations are constantly evolving. Stay informed about changes in tax laws.

How Do You Know When to Collect Sales Tax in a State?

Tracking your sales data is essential. If your business hits a state's economic nexus threshold, you must start collecting sales tax. Fortunately, many states provide online tools to help you figure out when to start collecting and remitting tax. Automated tax software can make this tracking much more manageable by calculating and flagging your thresholds.

How Can You Avoid Penalties and Ensure Compliance?

Despite the risks of errors and noncompliance, you can take these practical steps to ensure your company complies with multi-state sales tax regulations.

Monitor Your Sales Regularly

Keep a close eye on your sales and transaction volumes. Many tax software platforms can help you track your economic nexus status and notify you when you're approaching a threshold in a new state.

Register for Sales Tax Permits Right Away

As soon as you meet a state's nexus requirement, don't wait—register for a sales tax permit. Each state has its own registration process, so make sure you follow the applicable guidelines.

File Sales Tax Returns on Time

Missing deadlines can lead to fines and audits, so make sure you file your sales tax returns on time. Even if you didn't make any sales during a tax period, some states still require a return, so don't overlook this.

Stay Informed About Changes in Tax Laws

Sales tax regulations are constantly evolving. States may update their economic nexus thresholds or expand the types of goods and services subject to sales tax. To stay compliant, subscribe to updates from tax authorities or rely on tax software that automatically tracks changes in the law. In addition, the Multistate Tax Commission (MTC) provides information and assistance to taxpayers to help them comply with existing sales tax regulations.

What Tools Can Help You Manage Multi-State Sales Tax?

Feeling overwhelmed by these rules? You're not alone. Many entrepreneurs face similar challenges, but the good news is that you don't need a full-time tax team to manage it. Let's look at two tools or strategies that can help.

Sales Tax Software

Various tax software solutions are available that can help streamline the process of managing multi-state sales tax while reducing human error and saving time. These tools can calculate sales tax based on real-time data for each state, automate filings, and even provide reminders for important deadlines.

Outsourcing to Professionals

If you want to be sure you're handling sales tax correctly, you can outsource the task to tax professionals. They'll handle state registrations and filings, ensuring you comply with changing regulations while allowing you to focus on growing your enterprise.

Practical Steps for Long-Term Sales Tax Compliance

Long-term compliance requires ongoing attention, but it's manageable with the right systems in place. Let's look at some of the steps you can take.

Conduct a Nexus Study

Periodically review your business activity in different states to determine where you have economic nexus. This will ensure you're collecting sales tax where necessary.

Automate Sales Tax Calculations

Automating sales tax calculations can minimize errors and ensure you charge the correct rates based on each customer's location.

Maintain Thorough Records

Keeping detailed records of your sales and tax filings for each state will be critical if you ever face an audit. Consistency and proactive management are essential to long-term success. Handling sales tax across multiple states can feel overwhelming, especially after the Wayfair ruling made compliance more complicated. But by using the right tools and keeping up with the latest laws, you can avoid penalties and confidently grow your company.

Disclaimer: Bizee and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.