The filing of taxes is a part of life business leaders know is unavoidable. From the largest to the smallest company, the aim is to limit the amount of tax a business has to pay every filing season. The 2020 COVID-19 pandemic sped up the switch to online retailing by retailers and service providers, with sales taxes becoming more of an issue.
A Supreme Court case was brought in 2018 by the state of South Dakota calling for the online retailer, Wayfair, to pay taxes on sales made in the state. Wayfair unsuccessfully argued sales taxes are charged against companies who have a physical presence in a territory. The Journal of Accounting reports the decision by the Supreme Court led to the development of the sales tax nexus spanning more than 40 states.
Understanding the Tax Nexus
Taxes are complicated enough without introducing more vocabulary to the process of filing taxes. There are several types of economic nexus, including:
- Sales tax nexus
- Online nexus
- Corporate income nexus
Starting at the beginning, it is possible to discover how the tax nexus system works. A retailer working from a brick-and-mortar store will have limited sales tax problems. Without the introduction of online sales, taxes will be charged on goods and services at the specified rate in a city and state. The economic nexus comes into play when online retail options allow sales to be made in different areas. As soon as an online retailer begins selling products in another state, an economic nexus is made with its tax agency. The establishment of an economic nexus means sales taxes need to be paid in separate states, depending on the location of the buyer.
Understanding Nexus Thresholds
Online sales have been assessed as the responsibility of the business to track and not individual tax agencies in each state. The common legislation establishing economic nexus laws in each state detail the threshold at which online retailers begin to pay sales taxes.
The Blueprint explains more than 40 states have established economic nexus laws and have decided on their own threshold for sales taxes. Several states have introduced thresholds at or above $100,000 to limit the effects on small businesses. Several states have raised their threshold to $250,000 before out-of-state businesses are required to pay sales taxes.
The Responsibility Lies with the Business Owner
Paying taxes places the onus of responsibility on the business owner to pay their taxes in full. The economic nexus for sales tax does not change the responsibility as the small business owner needs to track their sales in different states. What has changed for small business owners is how a state tax agency will chase them for compliance.
California has led the way in sending out notices giving deadlines for compliance in paying previous years’ sales taxes. The first group of merchants to be asked to repay outstanding taxes in California were those offering fulfillment by Amazon for their customers.
The Golden State is forcing online retailers to prove they do not need to pay outstanding taxes based on their sales history. For retailers, the need to keep accurate records of sales has grown in the last few years. There are several programs in place to assist online retailers looking to become current with their sales tax.
VDA and Amnesty Programs
An online retailer may believe they are current with their taxes and wish to limit their responsibilities by agreeing to pay outstanding taxes with a state tax collector. There are several ways to do this, with each business needing to determine what their best option is for limiting losses. The first option is to pay the entire outstanding amount and halt any future problems with taxes.
The use of Voluntary Disclosure Agreements, VDAs, has become popular as a way of paying outstanding taxes with a limited outlay. The benefit of choosing a VDA for economic nexus payments includes the limiting of responsibilities to three or four years. Business owners who have been selling products and services for over three years will often receive deep discounts through the use of a VDA.
Tax amnesty programs have been established in several states where the introduction of the economic nexus has caused problems for retailers. A tax amnesty looks back across the history of sales by a company, with penalties and interest charges removed or discounted.
The Nexus is Here to Stay
The way an online retailer files their taxes has changed forever through the introduction of the nexus. By using software to remain up-to-date on the level of sales to any state, a retailer can limit the problems they see when filing taxes. The states where the nexus is already in place are becoming more aggressive in their collection activities, meaning business owners need to take action sooner rather than later.
In the U.S., the sales tax nexus will continue to address the loss of taxes paid into the general fund. The pandemic has lowered the levels of sales tax charged across the U.S. and made the economic nexus an important part of the economy at local and national levels.