Sales taxes aren't sexy. Strategizing about how to grow your customer base or increase sales is much more exciting than developing a sales tax plan. But unpaid sales taxes, along with interest and penalties, can undercut your profits and stunt your business growth.
In fact, if you're growing quickly, sales taxes could be your biggest tax liability. You owe it to your business to become sales tax savvy.
Unfortunately, the changes since the 2018 Supreme Court South Dakota v. Wayfair decision have made sales taxes more complex, even for very small businesses. Here are four things you need to know to understand and manage your sales tax liabilities.
1. Understand where you have nexus.
In the United States, 45 states and Washington, D.C., levy sales taxes. Nexus is the requirement to collect sales taxes in a particular state. In the past, nexus was triggered mainly by a physical presence such as an office, store, or warehouse. Wayfair created a new category to address the era of online shopping: economic nexus.
The threshold for economic nexus varies from state to state. You have nexus in Georgia once you sell $100,000 or have 200 transactions in a calendar year. In California, nexus is triggered by $500,000 in sales with no transaction limit. Sales tax automation software like PwC TaxVerse can help you track your nexus status, so you always know where you have sales tax obligations.
2. Know where your goods and services are taxable.
States have varied and expansive definitions of what is taxable. For example, SaaS (software as a service) is subject to sales tax in some states. Confections may or may not be taxable, depending on the ingredients and how a state defines and taxes candies. Clothing items that are tax-exempt in one state may be taxable in another. It's crucial to understand the tax regulations that apply to your products in each state.
3. Factor sales tax nexus into your business plans.
Economic nexus isn't the only new and evolving nexus risk. If you are a traveling salesperson who spends time in a state, even if you are not based there, can trigger nexus. In some circumstances, you may have sales tax nexus in the states where your marketing affiliates are based. Even advertising can sometimes be the basis for state revenue agencies to determine you need to be collecting sales tax.
Use this information to inform your business decisions. It might make sense to hire a remote employee or move inventory to a new warehouse. However, these decisions have sales tax implications. Factor sales tax exposure into your financials so you can quantify any liabilities properly.
4. Don't collect sales taxes in states where you don't have nexus.
If you are clear where you do have sales tax nexus, you will also understand where you don't. While simply collecting sales taxes on every sale might seem like a way to stay safe from penalties and interest, this can unnecessarily dampen sales.
When you can offer your products to a customer without added sales tax, that is an incentive to buy. It's a leading practice not to collect sales tax on online sales unless you are legally required to do so.
What is your sales tax strategy?
Even very small businesses can't afford to ignore sales taxes and hope that they won't get caught. Since the Wayfair decision, states have increased their collection efforts. A sales tax strategy based on a clear understanding of where your business has sales tax nexus is a great way to help protect your business from sales tax pitfalls. PwC TaxVerse makes sales tax compliance easy for fast-growing businesses.
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