This is a guest blog from our friends and partners at Avalara, experts in automated tax software and compliance.
It’s no secret there have been some huge changes recently to the way that US sales tax is identified and charged. As Brightpearl’s premier indirect tax partner, we’d like to take the opportunity to walk you through a few of the ones that are bound to impact your business at one time or another.
The United States is a huge country filled with 50 states joined by an economic union. It is important to think of each state as its own country as they have substantial autonomy when it comes to what taxes they charge and how they go about defining what is taxable. This means that no state has the same tax rate as another. Some states like Michigan or Idaho have only one taxing jurisdiction so selling there is relatively simple. Others, like Alabama and Colorado, have hundreds of different jurisdictions that have their own size and taxability fluctuations every couple of weeks. It’s fair to say it’s a lot to keep track of but unfortunately, ignorance is not an excuse when it comes to not complying with these changes.
Nexus is a word you will hear a lot if you’re dealing with sales tax. Simply put, it is the connection between a transaction and the state. If a company has nexus then it means that they have a requirement to register for, calculate, collect and file US sales tax within that state. Before 2018, companies only had nexus when they had a physical presence in that state – for example goods in a warehouse, a brick and mortar store or salespeople working within that territory. However, that changed drastically in June of 2018 when the Supreme Court, in a landmark ruling, declared that the old way of judging nexus needed revamping in the age of ecommerce and SaaS products.
The Supreme Court decided that, as well as having physical goods in a state, nexus could also be triggered by breaching distance selling thresholds within that state. At the time of writing, 35 states have adopted the following thresholds which now trigger nexus:
If a company breaches the above thresholds then they are liable for sales tax within that state. The large commerce states of California, New York and Texas have adopted these thresholds with Florida not far behind. These rules have come into effect immediately and state audit departments are actively monitoring companies who are not registering and legally managing their compliance once they have breached these thresholds.
These regulations were introduced as another channel for states to generate revenue for state projects that are badly needed and under-funded. Potholes are not going to fix themselves and hospitals do not run on good will. In 2017, there was a sales tax gap of $150 billion across the US and the tax offices around the entire country are now being unshackled. Inspector Poirot-level investigations are being planned to find companies who are non-compliant. On average, a company will be audited for the first time within three years and the cost of non-compliance, according to a 2017 case study, is $114,000. This cost is made up of lost work hours, interest, penalties and unpaid taxes, not to mention additional headcount to manage the audit and the potential loss of reputation.
It should be easier right? Thankfully, Avalara have a solution that has pre-built connectors to Brightpearl’s platform that automates the way that sellers calculate, collect, file and remit sales tax across the US. It’s called Avatax and it’s currently trusted by over 20,000 customers across the globe. Last year, Avatax was used in 2% of all transactions that took place in the US.
If you’d like to talk about how we can reduce the cost, time and risk of managing your US sales tax compliance, get in touch and chat to me about Avatax today.