Economic Nexus is the New Normal: 3 Ways to Stay Compliant as a Small Business

It’s been well over a year since the landmark South Dakota v. Wayfair Supreme Court case that struck down the “physical presence” rule established in the Quill Corp v. North Dakota case of 1992. With this decision, if you’re doing enough business in a given state, you are responsible for collecting and remitting sales taxes — the result of a patchwork of economic nexus laws that are, simply put, confusing.

Although more than 40 states have already adopted new legislation in the year following the decision, there is still much confusion surrounding the idea of “nexus” and which sellers are beholden to these new laws. To be fair, most of this confusion is well-founded: the minimum sales threshold that determines whether remote sellers must collect and remit sales tax varies from state to state, and some states are still in the process of adopting new tax legislation that aligns with the Wayfair decision from SCOTUS.

If you’re figuring out where you might need to collect, if at all, here are a few tips to help you get started navigating the increasingly complex world of sales tax in the U.S..

Speak to your advisor

First and foremost, businesses should speak to a tax professional about what they sell, where they sell in the U.S., and ask about the new economic nexus law thresholds. The thresholds can come in the form of either a monetary value (for example, $100,000 of sales in that state in a given year), or a minimum amount of sales transactions made in that state. Because these statutes vary between states, employing the help of a tax expert can be the difference between compliance and headaches for you and your business.

Streamlined Sales Tax (SST)

The burden of collecting and remitting sales tax post-Wayfair can be lessened for small businesses by the Streamlined Sales and Use Tax Agreement (SSUTA).

SST grew out of the need to simplify sales tax compliance and a desire from states to tax remote sales given the emergence of ecommerce. Participating states (Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming) decided to streamline sales and use tax compliance because the Supreme Court of the United States had twice ruled — in National Bellas Hess v. Illinois (1967) and Quill Corp. v. North Dakota (1992) — that state and local sales tax compliance was too complicated to inflict on out-of-state businesses with no physical presence in the state.

Thus, state and local governments worked with the business community to simplify the complex sales tax systems that led to the Supreme Court rulings in National Bellas Hess and Quill. The resulting Streamlined Sales and Use Tax Agreement works to make sales tax administration in SST states less costly and burdensome for all businesses and all types of commerce.

There are several financial benefits to registering through SST as well, including: 

• Member states currently subsidize or fully cover the cost of outsourcing sales tax administration to an SST Certified Service Provider (CSP), like Avalara.
• There’s no cost for sellers collecting only in SST states, and reduced costs for sellers collecting in both SST and non-SST states.
• The CSP works with a seller’s accounting system to identify the taxability of products and services, apply the appropriate rate, and maintain a record of the transaction.
• Businesses that use a CSP are also protected from audit liability.

Automation

As businesses grow, they are more likely to trigger a form of nexus, or an obligation to collect and remit sales tax in new states. More states are expanding the definition of nexus to include activities such as employing remote staff and attending tradeshows. And the borderless nature of software delivery means a tiny startup can have customers in every state. All this pushes businesses out of compliance as existing processes for managing tax are no longer adequate.

It’s no secret by now that automation can help businesses make their processes more efficient and lower costs, and this certainly applies to sales tax collection. Automation providers like Avalara offer services that not only help businesses determine whether they meet specific remote seller thresholds, but also automatically collect and remit sales taxes in states in which the threshold has been met.

Businesses can substantially simplify their interstate sales tax collection processes by employing any, or all, of the strategies listed above. Doing so can free up vital human and technological resources that can then be dedicated to more business-critical tasks.