Economic Nexus and Sales Tax Compliance in 2024

This June will mark six years since the U.S. Supreme Court’s decision in Wayfair v. South Dakota, the landmark sales tax case that paved the way for economic nexus and altered sales tax compliance for thousands of taxpayers. Before Wayfair, nexus was based on physical presence in a state. Economic nexus is based on specified activity in a state, most frequently a level of receipts or sales (e.g., $100,000 in annual sales). Every week we have discussions with companies still trying to comprehend and address their sales tax obligations stemming from state economic nexus laws that originate from Wayfair.

Forty-five states and the District of Columbia impose sales and use taxes (Alaska has no state sales tax but localities in the state may impose a sales tax). Multistate sales and use tax administration is complex and presents myriad opportunities for companies to make costly missteps. A seller’s sales tax responsibilities in a state are based on the concept of nexus (connection to) and whether the company has created nexus with a state. If the company has nexus with a respective state, then it typically has registration and collection responsibilities with that state. But that is not the end of the taxpayer’s responsibilities, the company must evaluate the state’s tax rules in conjunction with its activities and the products or services it sells in the state.

When a business determines it has a sales tax nexus with a state or states, it often immediately registers for sales tax in the state(s) without fully considering the implications. Before submitting a sales tax registration application, a company should understand the following points: First, when was nexus created, and is there historic tax exposure to address? Most states offer voluntary disclosure programs that limit lookback periods and offer penalty abatement when taxpayers voluntarily come forward. Taxpayers registered in a state are often ineligible for that state’s voluntary disclosure program. This makes understanding any prior exposure an important question to address before registration. In addition, state sales tax registration applications require a taxpayer to list the “date of first activity (sales)” in the state.

Consequently, some states send nexus questionnaires to taxpayers after registering to determine if the taxpayer had liability before their disclosed “date of first activity”. Second, are the company’s tax systems prepared to address state and local sales tax rates across potentially thousands of jurisdictions? A company may need to consider sales tax rate calculation software if its current systems do not contain sales tax rates across all states. The taxpayer must also review taxability rules across all states where the company has sales tax nexus. The taxability of products, services, and customers can vary dramatically from state to state. Lastly, has the company reviewed other state taxes impacted as part of the sales tax registration? This evaluation may include whether there were prior registrations for payroll in the state (that potentially triggered nexus) or if there is now a requirement to add corporate income tax filings in conjunction with the sales tax registrations. A poorly timed sales tax registration can limit the options to address existing exposure in other taxes beyond sales tax and even bring these exposures to a state’s attention.

The sales tax registration process varies by state in part due to the differing software used by each state’s tax website. There is uniformity among a group of states (about half) that utilize the same tax software for their websites which results in a familiar sales tax registration process in these states. However, several states utilize their homegrown tax software (Kentucky and Ohio, as examples) which is often harsh to registrants and rarely yields a registration process that can described as smooth. To minimize frustration and time spent on online sales tax registrations, we advise taxpayers to gather company information before starting a sales tax registration application. The required company information usually consists of legal company name, address, phone, entity type, state of incorporation, date of incorporation, and NAICS. States typically require that a registrant list at least one officer or responsible party on the registration application. The officer’s information includes name, address, title (and title date), email address, phone, social security number, date of birth, and in some states, driver’s license number and even a copy of the driver’s license (California).

The complexity of sales and use taxes and the inconsistencies from state to state make it a challenge for any company to manage. HBK SALT Advisory Group has the expertise to assist with your company’s sales and use tax compliance from nexus evaluation to registration to sales tax returns. If you have questions on sales tax registrations or need assistance with registering with the states, please contact the HBK SALT Advisory Group at hbksalt@hbkcpa.com