No one enjoys doing business with a target on their back (unless they’re not aware of it in the first place). But in this case, ignorance is not bliss and just because your business hasn’t flagged new obligations regarding sale taxes, doesn’t mean that it isn’t flagged by tax authorities. However, due to the lack of standardization within US sales tax, many businesses are forced to settle for the stress of never fully knowing whether they’re compliant.
That ends here.
We’re looking at how businesses can pinpoint whether they’re subject to US sales tax and, if so, what to do about it.
But first, let’s cover the (not so) basics.
What is US sale taxes?
Sales tax is a consumption tax that the government levies on the sales of goods and services. This is generally paid by the end-user of a product or service in the form of a percentage of the sales total. These additional costs act as an essential source of revenue for US jurisdictions.
For the regular consumer, paying sales tax in the US is almost second nature, and many do so without needing to understand the system’s intricacies. However, understanding sales tax is critical for businesses that are required to collect these taxes and subsequently liable to compliance rules.
The first step? Figuring out whether or not your business is liable in the first place.
Does your business need to collect US sale taxes?
Generally, sales tax obligations kick in when your business triggers a nexus. A nexus simply means that you have a sales tax connection to a specific state. Different states have different thresholds and trigger points. That means that although you may be exempt from sales tax in one state, another state could have flagged your business for non-compliance.
Fortunately, you don’t have to settle the anxiety of not knowing where your business has an obligation towards sale taxes and where it does not. Here are the most common ways to tell whether or not your business is taxable for sale taxes in the US.
You sell a taxable product or service
In the past, determining whether or not you had a taxable product was relatively straightforward. However, as businesses in the digital age evolve rapidly, so does the scope of products and services that are considered taxable.
Although tangible products are taxable in most states, some tax digital goods and services. To properly gauge whether or not you’re liable for sales tax, you must first list all your products and services and compare them to the taxable goods and services in each state. This is a continuous process, as many states regularly update their sales tax scope as they adapt to the digital tax environment.
You have a physical presence in a state
Businesses are also subject to sales tax if they have a significant physical connection within a state. This is often referred to as a ‘physical nexus.’ Each state defines a physical nexus slightly differently. However, the general rules consider businesses to have a physical nexus if they have an office, warehouse, remote employees working in a state, or employees that frequently travel through a specific state. Physical nexus also includes any property, server equipment or data centers in a state.
Ultimately, determining your physical nexus heavily relies on interdepartmental collaboration between your sales, marketing, and HR departments, as each can trigger a physical nexus.
You’ve reached a sales or invoice threshold
Your sales and transactions in a state can trigger an economic nexus, holding you liable for sales tax compliance. Different states have different sales and transaction thresholds. However, the general rule of thumb is that if you hit $100,000 a year in any state, it’s worth a closer analysis.
Some states also have specific invoicing thresholds and hold businesses liable to sale tax obligations if they’ve reached a transaction threshold. This threshold is generally reached at about 100 invoices per year; however, (as always), it can vary per state.
If you’ve spotted any reason that your business may be liable to sales tax – tag, you’re it. However, rather than running after paperwork and losing sleep over sales tax, remove the work (and worry) from the process in one click.
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