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Why it’s Important to Assess Sales Tax Risk

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It’s coming up on two years since the Supreme Court of the United States issued its seminal ruling on South Dakota v. Wayfair, Inc. a decision that’s dramatically impacted sales and use tax laws across the country. All but a handful of states now enforce economic nexus, requiring companies with no physical presence in the state to register with the tax authority. Retailers must collect and remit all applicable sales taxes, file returns, and validate exempt sales, while companies with wholesale or exempt transactions may be required to register, validate exempt sales, and file returns.

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For businesses impacted by the decision, selling across state lines has become much more burdensome.

Yet many companies and individuals either are unaware of the Wayfair decision or don’t realize its potential impact. As a result, they’re continuing to do business in states where they lack a physical presence without considering whether they need to register to collect and remit sales tax or comply with other sales and use tax laws. Two years out, with 43 states, Washington, D.C., and many localities in Alaska enforcing economic nexus, these businesses are at risk of noncompliance — as well as negative audit findings and penalties and interest charges.

This may be because they’ve never heard of Wayfair or economic nexus. But it could be they just don’t realize economic nexus impacts them.

Most economic nexus laws provide an exception for companies doing less than a certain amount of business in the state. In California, that threshold is $500,000. In Arizona, it was $200,000 in 2019 but is $150,000 in 2020. In Maryland, it’s $100,000 or 200 separate transactions.

Adding to the complexity, sales and transaction thresholds in each state are based on different sales: Some states include retail sales only, while some include gross sales. Some states base the threshold only on sales of tangible personal property; others include digital products and/or other services.

These varying economic nexus thresholds make it extremely difficult for businesses to determine whether they have economic nexus in one or more states. To help make it simpler, Avalara has created a free sales tax risk assessment. After taking the assessment, you’ll have a much clearer idea of where you likely have economic nexus and a sales and use tax obligation. Learn more about the free assessment.

Gale Cole picture

Gail Cole is a Senior Writer at Avalara. She’s on a mission to uncover unusual tax facts and make complex laws and legislation more digestible for accounting and business professionals — or anyone interested in learning about tax compliance.

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