So, your business is expanding, and you now have touchpoints in multiple states. That’s great! Remember, though, that with that growth, the ever-watchful eye of state taxing authorities often becomes more intense. As sales channels expand and interstate commerce becomes more prevalent, staying compliant with sales tax regulations across multiple jurisdictions gets trickier. Central to this challenge is the concept of economic nexus, a critical factor that determines a business’s obligation to collect and remit sales tax in various states. (For those of you who have been tracking the history of “economic nexus”, note that we just passed the 6-year anniversary of the US Supreme Court’s ruling in South Dakota v. Wayfair (June 2018) – the inflection point for all states to ultimately jump on board and enact nexus rules based on sales volume rather than physical presence. For more on how the Wayfair decision has impacted small and mid-sized business, read this blog we wrote).

This can all seem a little scary – but it doesn’t have to be, and you certainly don’t have to go at it alone.

This article aims to guide businesses through strategic decisions to minimize tax exposure, helping them navigate the intricate landscape of sales tax nexus. Remember, doing it right is essential to avoid making sales tax your liability.

Here’s what you can find out.

  1. Understanding Sales Tax Liability
    • Definition and Importance: Learn about sales tax liability and its impact on compliance and business operations.
    • Types of Sales Tax Liabilities: Distinguish between current and noncurrent sales tax liabilities.
    • Consequences of Noncompliance: Understand penalties, interest charges, and legal issues from noncompliance.
  1. Calculating Sales Tax Liability
    • Steps to Calculate Sales Tax Liability: Follow a step-by-step guide to accurately determine sales tax owed.
    • Pre-payment Requirements: Know state-specific pre-payment requirements and their impact on cash flow.
  1. Strategic Decisions in Sales Tax Management
    • Key Strategies to Optimize Sales Tax Nexus Implications: Explore strategies to manage physical presence, economic thresholds, and exemptions.
  1. Leveraging Sales Tax Incentives
    • Types of Sales Tax Incentives: Identify various incentives like enterprise zones, manufacturing exemptions, and R&D credits.

Not what you’re looking for? Let’s talk. Reach out to us at info@milesconsultinggroup.com.

1. Understanding Sales Tax Liability

Sales tax liability refers to the obligation of a business to collect and remit sales tax on transactions within states where it has established nexus. Nexus, in simple terms, is the connection between a business and a state that triggers the responsibility for sales tax collection. This liability affects both online and brick-and-mortar businesses, necessitating a thorough understanding of the factors that establish nexus. For more on those factors, and nexus in general, read this article we wrote.

It’s important to distinguish between current and noncurrent sales tax liabilities. Current sales tax liabilities are taxes collected from recent transactions that a business must remit to the state within a specific period. These are generally straightforward since the sales tax is a pass-through cost that the business collects from the customer and passes on to the state. However, noncurrent sales tax liabilities refer to past due taxes that have not been remitted on time. These can become out-of-pocket expenses for businesses if they did not collect the sales tax from customers when required. Noncompliance with sales tax obligations can lead to penalties, interest charges, and legal complications, making it essential for businesses to stay current with their sales tax filings.

2. Calculating Sales Tax Liability

Accurately calculating sales tax liability is vital for compliance and financial planning. Here’s a step-by-step guide to help businesses calculate their monthly and annual sales tax liabilities:

  1. Identify Nexus States: Determine the states where your business has nexus based on physical presence, economic activity, or other criteria set by each state.
  2. Understand Tax Rates: Research the sales tax rates applicable in each nexus state, including state, county, and municipal rates, as these can vary significantly.
  3. Track Taxable Sales: Maintain detailed records of all taxable sales in each state. This includes online and in-store transactions, ensuring that all sales data is accurate and up-to-date.
  4. Apply Tax Rates: Multiply the taxable sales amount by the applicable tax rate in each state to calculate the sales tax owed.
  5. Utilize Tools: Use sales tax calculation tools and software to automate the process. Tools like Avalara, TaxJar, and others can help ensure accuracy and simplify the calculation process.
  6. Review and Remit: Regularly review your sales tax calculations to catch any discrepancies. Ensure timely remittance to avoid penalties.

It’s also worth noting that some states, such as California and New York, require pre-payments of sales tax. Businesses must make these pre-payments in the first and second months of each quarter, with the amounts credited when preparing the quarterly return. This system allows states to receive revenue faster and requires businesses to manage cash flow carefully.

Which states require accelerated sales tax payments?

Here are a few of the larger states requiring prepayments, as outlined by Avalara on their ‘Prepayments’ page. Note that other states may require prepayments as well. We include these states as examples.

California

Determination Period Range: This is subject to state review. If you’re uncertain about the determination period for a client, contact the CDTFA.

Requirement Threshold: The average monthly taxable sales must be $17,000 or more.

Frequency: Inverse quarterly.

Due Date: 24th of the month.

State-Approved Calculation Methods: For information on state-approved calculations, refer to the CDTFA website. The calculation method varies depending on the period for which the prepayment is due.

Supported Calculation Methods: 100% of monthly liability.

Reporting Format: Payments are made via the CDTFA website. Prepayments made through the prepayment filing calendar will appear as prior payments on the CA CDTFA 401 A2 or CA CDTFA 401 A2 Outlet return.

Set-Up Instructions: Add the CA Prepayment filing calendar. The default prepayment percentage is set to 100%, meaning the prepayment is calculated as 100% of the current period liability. If a different calculation method is needed, edit the filing calendar and enter a different prepayment percentage:

  • Enter 90% to meet the state’s minimum requirement.
  • If a full year of transaction data hasn’t been imported, calculate the prepayment amount outside the usual system and enter the amount as a prepayment adjustment.

Filing Method: Manual web file.

Additional Information: For the prepayment period from May 1 through June 15, due on June 24th, a different calculation method is required. This calculation is not automated, so you’ll need to manually adjust the prepayment amount when preparing the prepayment filing calendar for that month.

Florida

Determination Period Range: July to June.

Requirement Threshold: If you paid $200,000 or more in state sales and use tax on returns filed during the most recent state fiscal year (July 1 through June 30), you must make an estimated sales tax payment every month, starting with the December return, due January 1.

Frequency: Monthly.

Due Date: 20th of the month.

State-Approved Calculation Methods:

  • Average Tax Liability: 60% of the average monthly sales tax amount during the previous calendar year (beginning on the December tax return due in January).
  • Current Month of Previous Year Tax Liability: 60% of the tax liability from the same month in the previous year.
  • Current Month Liability: 60% of the tax liability that will be due with the next return.

Supported Calculation Methods:

  • 60% of the average monthly sales tax amount during the previous calendar year.
  • 60% current month prior year liability.
  • Fixed amount.

Reporting Format: Prepayments and prior payments are reported on the FL DR15 and FL DR15CS returns.

Set-Up Instructions: Add the FL DR15 or FL DR15CS filing calendar. The default prepayment percentage is 60%, which means that the prepayment is calculated as 60% of the prior calendar year average liability. If a different calculation method is needed, edit the filing calendar:

  • Enter a prepayment percentage of 60% to calculate the prepayment as 60% of the current month from the prior year.
  • Enter a fixed dollar amount.

If a full year of transaction data hasn’t been imported, calculate the prepayment amount outside the usual system and enter the amount as a prepayment adjustment.

Filing Method: File electronically.

New York

Inverse Quarterly

Use this prepayment method if the client files the NY ST810 quarterly return and meets the requirement threshold.

Determination Period Range: June to May.

Requirement Threshold: Liability of $300,000 or more in a quarter.

Frequency: Inverse quarterly.

Due Date: By the 20th of the month.

State-Approved Calculation Methods: 100% of monthly liability.

Reporting Format: Payment is made via the NY ST809 filing calendar. Prepayment amounts remitted through this filing calendar flow to the NY ST810 quarterly return as a prior payments credit.

Set-Up Instructions: Add the NY ST809 filing calendar. The default prepayment percentage is 100%, meaning the prepayment is calculated as 100% of the current month’s liability.

If a full year of transaction data hasn’t been imported, calculate the prepayment amount externally and enter the amount as a prepayment adjustment.

Filing Method: Manual web file.

Determination Period Range: June to May.

Requirement Threshold: Liability exceeding $500,000 between June 1 and May 31.

Frequency: Monthly (refer to the NY Department of Taxation and Finance website for payment periods).

Due Date: Three business days after the 22nd.

State-Approved Calculation Methods:

  • Actual Method: Payment must be at least 90% of the actual sales and use tax liability for days 1 through 22 of the current month.
  • Estimated Method: Payment must be at least 75% of one-third of the liability for the comparable quarter of the preceding year.

For both methods, sales tax participants must also electronically pay the balance of their monthly tax liability for days 23 through the end of the month by the PrompTax due date in the succeeding month.

Reporting Format: Payment is made via the NY PrompTax filing calendar. Prepayment amounts remitted through this filing calendar flow to the NY ST810 quarterly return as prior payments.

Set-Up Instructions: Add the NY PrompTax filing calendar. Calculate the prepayment amount externally and enter the amount as a prepayment adjustment.

Filing Method: Manual web file.

ST-330

Use this prepayment method if the client files the NY ST100 or NY ST101 return and chooses to make an advance payment toward their sales tax liability.

Determination Period Range: June to May.

Requirement Threshold: No threshold requirements.

Frequency: Inverse quarterly.

Due Date: By the 20th of the month.

State-Approved Calculation Methods: None specified.

Reporting Format: Payment is made via the NY ST330 filing calendar. Prepayment amounts remitted through this filing calendar flow to the NY ST100 or NY ST101 returns as a prior payments credit.

Set-Up Instructions: Add the NY ST330 filing calendar. The default prepayment percentage is 100%, meaning the prepayment is calculated as 100% of the current month’s liability.

If a full year of transaction data hasn’t been imported, calculate the prepayment amount externally and enter the amount as a prepayment adjustment.

Filing Method: Manual web file.

For detailed breakdowns of all states that require prepayment, consult the Avalara website here.

3. Strategic Decisions in Sales Tax Management

Effective sales tax management is critical for businesses aiming to optimize their tax obligations and reduce exposure to penalties. Strategic decisions related to physical presence, employment, inventory, and third-party relationships can significantly impact a company’s sales tax nexus and liability. By making informed operational decisions, businesses can navigate the complexities of sales tax regulations more effectively.

How Informed Operational Decisions Can Optimize Sales Tax Nexus Implications

  1. Physical Presence: Physical presence in a state, such as having a brick-and-mortar store, office, or warehouse, creates sales tax nexus. This means the business is required to collect and remit sales tax in that state. Companies should carefully evaluate their expansion plans, considering the sales tax implications of establishing a physical presence in new locations.
  2. Employees: Having employees in a state, whether they are sales representatives, support staff, or remote workers, can establish a sales tax nexus. Businesses must account for the tax obligations that arise from employing personnel in different states. Strategic decisions regarding hiring and the location of employees can help manage and minimize these tax liabilities. (In today’s economy where more companies are employing remote employees, we are seeing many more clients trip into physical presence nexus.)
  3. Inventory: Storing inventory in a state, either in company-owned warehouses or through third-party logistics providers, also triggers a sales tax nexus. Businesses should consider the tax impact when deciding on warehousing and inventory management strategies. Efficiently managing inventory locations can help optimize sales tax obligations. (Note that programs like Fulfillment by Amazon can also create inventory in states that you may not have planned for. It’s important to consider the costs/benefits of using these types of programs.)
  4. Third-Party Contractors and Services: Engaging third-party contractors, such as those providing white-glove delivery services or installation, can create a nexus if these contractors operate in a state where the business does not otherwise have a physical presence. It’s essential to understand how these relationships affect sales tax responsibilities and to structure contracts and services accordingly.
  5. Software and Digital Products: Selling software or digital products can complicate sales tax obligations, especially with varying state regulations on digital goods. Companies must stay informed about how different states tax software sales and ensure compliance with these rules. For more detail on calculating and collecting sales tax for software and digital products, read this article we wrote.

4. Leveraging Sales Tax Incentives for Purchases made

One effective strategy to minimize tax exposure for businesses is leveraging available sales tax incentives. By identifying and utilizing these incentives, companies can often significantly reduce the amount of sales tax they pay on specific purchases, , leading to substantial savings and enhanced competitiveness.

Identifying and Utilizing Sales Tax Incentives to Minimize Liability

Sales tax incentives are designed to encourage certain activities within a state, such as manufacturing, renewable energy adoption, and environmental conservation. Here are some key incentives businesses should consider:

  1. Manufacturing Exemptions: Many states offer sales tax exemptions on equipment used in manufacturing. These exemptions aim to promote industrial growth and retain jobs within the state. Many states offer a full exemption of sales tax for the purchase of qualifying equipment. However, it’s crucial to note that not all states provide full exemptions; some may only offer partial relief.

For example, California offers just a partial sales tax exemption for manufacturing and research and development equipment, which can still significantly lower the cost of acquiring necessary machinery.

  1. Solar and Renewable Energy Exemptions: To incentivize the adoption of clean energy, several states provide sales tax exemptions for solar energy systems and other renewable energy equipment. These incentives not only reduce upfront costs for businesses investing in sustainable practices but also align with broader environmental goals.
  2. Energy Efficiency Exemptions: Similar to renewable energy incentives, some states offer exemptions for energy-efficient equipment. This can include items like HVAC systems, energy-efficient lighting, and other technologies that reduce a business’s overall energy consumption.
  3. Electric Vehicles (EV) Exemptions: With the increasing push towards electric vehicles, some states are now offering sales tax exemptions for EV purchases. Businesses that integrate electric vehicles into their fleet can benefit from these incentives, further reducing operational costs.
  4. Recycling Equipment Exemptions: States like Ohio provide sales tax exemptions for equipment used in recycling. This not only encourages environmentally responsible practices but also reduces the financial burden on businesses adopting sustainable waste management solutions.

It’s important to note that in all the cases mentioned above, states will generally require the purchaser of the qualified equipment to provide an exemption certificate to the seller. These exemptions can come in varying forms across the states, so it’s important for the seller to properly maintain these exemptions in case of an audit.

Effectively managing sales tax liability requires a proactive and informed approach. By understanding the nuances of sales tax nexus, calculating liabilities accurately, making strategic operational decisions, navigating new laws, and leveraging available incentives, businesses can minimize tax exposure and ensure compliance.

Staying informed about the evolving regulatory landscape and seeking professional guidance are essential steps in this process. For expert assistance in navigating the complexities of sales tax nexus and optimizing your tax strategy, come to Miles Consulting Group – book a consultation, drop us a line, or send us an email at info@milesconsultinggroup.com.

As sales tax laws continue to change, businesses must remain vigilant and adaptable, ready to implement best practices in sales tax management. By doing so, you can mitigate risks, optimize your tax position, and focus on what you do best: growing your business.