November 9, 2021
COVID-19 thrust an unprecedented number of employees into a remote-work lifestyle. But what many businesses didn’t expect at the start of the pandemic was how this new model of work would become the norm for many industries, even after initial lockdowns ended.
While remote work has proven gainful for many businesses, offering new advantages like greater flexibility and access to a more diverse talent pool, these have come alongside new sales tax implications that have blindsided many businesses.
The issue begins with nexus.
Nexus is the connection between a business and state that requires the business to register and remit sales tax to said state.
There are two ways businesses establish nexus with a state:
• Physical presence: when an employee(s) lives and works in that state
• Economic threshold: when a business either conducts more than $100k in annual sales in that state or conducts more than 200 separate transactions a year in that state
Until now, businesses have been able to control in which states they establish nexus fairly easily, either by limiting in which states remote employees were allowed to work (usually to states where the business already had an established office or warehouse) or by monitoring their economic activity in each state.
COVID-19 has changed all of this.
Remote employees have gone from being the exception to the norm, and this trend isn’t expected to reverse anytime soon. While health concerns are a persistent reason to remain remote, many workers also want to continue working remotely to, for example, bypass long commutes, help manage childcare, and evade geographic restrictions in order to earn more competitive wages.
More remote employees means that businesses have a physical presence in more states around the country and, thus, obligations to compute, collect, and remit sales tax to more jurisdictions.
Even as COVID-19 begins to wane, remote work remains in vogue, and businesses must pivot to swiftly comply with the new sales tax implications that come with operating on a multi-state scale.
Why is multi-state sales tax compliance so complicated?
Each state has its own sales tax laws, so taking a one-size-fits-all approach isn’t a possibility. And the number of different sales tax rates doesn’t cap at 45 (the number of states that levy a sales tax); there are actually over 12,000 different sales tax rates in the U.S. This is because tax rates can differ within a jurisdiction depending on the type of product or service rendered; moreover, local counties, municipalities, and other special taxing districts can each add their own surcharge to the tax.
In addition to considering a bevy of diverse tax rates, businesses also need to understand the taxability of their unique products and services. For example, if a business delivers bundled transactions in which taxable and nontaxable items are sold together, does that make the entire transaction taxable? New technology products and services also pose complications for businesses, as many jurisdictions don’t yet have policies in place to govern how digital products like cloud computing and Internet advertising should be taxed.
Acknowledging multi-state nexus and understanding the taxability of all different products and services are only the first steps when it comes to fulfilling the necessary sales tax obligations.
For businesses, the real burden comes through in the act of compliance and the sea of paperwork that abounds: What’s the right form to use? Where should this form be filed? When should this form be filed? What needs to be included on returns? To further complicate things, different states often have different deadlines for filing taxes, as well as different frequencies at which they must be filed.
Taking on this kind of work is tedious, burdensome, and complex. It’s also intimidating. Wrongly-filed forms, late filings, underpayments, or other common errors can result in weighty penalties and increased scrutiny for tax audits.
Managing sales tax compliance on a multi-state scale is an onerous job and one that took most businesses by surprise. While initial lockdown periods temporarily displaced workers from offices, no one foresaw such a dramatic diffusion of remote work, nor did anyone anticipate its endurance as an ongoing trend and its potential to shape the future of work. Similarly, businesses did not anticipate having to take on multi-state sales tax compliance and all the complexities, aggravation, and stress that come with it.
Perlson LLP professionals are here to help you tackle multi-state sales tax compliance. Contact us at 516-541-0022 for advice and guidance navigating this new tax terrain.