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The Domino Effect of Sales Tax Nexus

09/14/2018  |  By: Brian Strahle, Senior Manager, State Tax Recovery & Risk Management

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The good news is the question of whether you have a taxable presence in a state (i.e., nexus) got easier. The bad news is that it is easier to have nexus in a state, and therefore, the tax-ability, exemption, compliance and audit issues you will have to deal with just multiplied.

This is the time to manage your risk and avoid the ‘domino effect’ of this change. Don’t be liable for tax you could have collected from your customer, and don’t overpay sales tax or use tax on your purchases.

Make your company audit ready, and mitigate sales and use tax risk by completing the following steps:

  1. Determine Prospective Nexus. Compare the chart to your company’s sales-by-state for the last calendar year or prior 12-months (depending on the state). If your company is over the threshold in any state, move on to Step 2.
  2. Determine Prior-Year Nexus. Review your company’s connections or physical presence activity in prior years for the states you identified in Step 1.
  3. Evaluate State Income Tax Impact. Conduct both #1 and #2 for state income tax purposes to avoid collateral damage.
  4. Determine Taxability. The tax treatment (taxability) of what your company is selling (i.e., products, services, bundled transactions, etc.) may be different in each new state.
  5. Identify Exemptions. Determine if any exemptions apply to the products or services your company is selling in each new state.
  6. Get Your Use Tax Right. Perform a reverse audit of your company’s purchases (accounts payable) to determine overpayments/underpayments in preparation for more vendors charging your company sales tax.
  7. Obtain Exemption Certificates. Prepare to offer exemption certificates to vendors that start charging your company sales tax on your purchases.
  8. Mitigate Liability. Consider whether your company should enter into Voluntary Disclosure Agreements with any new states before collecting sales tax prospectively.
  9. Consider Tax Decision Software. Determine whether your company needs to acquire and implement new tax decision software, or will continue to use a manual process.
  10. Assess Outsourcing Compliance. Determine whether outsourcing your sales tax compliance would be cost-beneficial.
  11. Register and File. Register in each new state for sales tax collection while considering the income tax impact and other taxes. File timely returns on a go-forward basis.
  12. Monitor and Maintain. Monitor state tax law changes and business changes. Maintain taxability engine rules or a manual taxability matrix for sales and purchases on an annual basis.

Please contact your LBMC client service partner to determine the impact on your company, or contact Brian Strahle, Senior Manager, State Tax Recovery & Risk Management team at brian.strahle@lbmc.com or 615.309.2797.

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.

Posted in: Tax
Tagged with: State and Local Tax, Tax