What’s a sales tax risk assessment, and why should you get one

This post has been updated; it was originally published in October 2020.

Any business with customers in other states risks creating sales tax nexus with those states. Sales tax nexus is an obligation to register with the tax authority and comply with applicable sales and use tax laws. However, simply making a sale into another state doesn't automatically give an out-of-state business nexus. Sales tax laws are more nuanced than that.

A sales tax risk assessment helps determine where you have sales tax nexus and where you're most at risk of establishing it. But first, it's important to review how sales tax nexus is created.

How is sales tax nexus created?

There are several ways to create sales tax nexus, including having ties to in-state affiliates. Yet the most common ways businesses establish nexus are through physical presence or economic activity in a state.

Physical presence nexus

Physical presence nexus can be created in all states that have a sales tax, which is most states. There's no statewide sales tax in Alaska, Delaware, Montana, New Hampshire, and Oregon, but Alaska allows local sales taxes).

Having a physical presence in a state includes leasing, owning, or renting a facility like an office or warehouse. It can also include having inventory in the state, such as when a marketplace seller stores goods in a marketplace facilitator's warehouse. Additionally, nexus can be established through the presence of employees or contractors in a state, even temporarily.

Economic nexus 

Economic nexus is newer than physical presence nexus; a physical connection to a state was required for nexus until the United States Supreme Court decision in South Dakota v. Wayfair, Inc. (June 21, 2018). Today, a remote business can establish nexus solely through economic activity in 45 states, the District of Columbia, and some local jurisdictions in Alaska.

All economic nexus laws provide an exception for small sellers - those selling below a distinct economic nexus threshold. Since each state's threshold is unique, businesses must constantly monitor sales into different states to determine whether they've met the economic threshold. It's a task that requires careful attention.

Fortunately, you don't have to navigate these complexities on your own.

How a sales tax risk assessment can help

The in-depth Avalara Sales Tax Risk Assessment offers a detailed analysis of your sales tax obligations. By completing a sales tax nexus questionnaire, you'll learn where you likely already have sales tax nexus and where you're most at risk of establishing it. Knowing where you could be at risk can help you avoid costly compliance errors.

Once we know what you sell, how much you sell, and where you sell it, you'll receive a comprehensive written report detailing your sales tax liability risk. You'll also have the opportunity to consult with a nexus specialist, allowing you to ask questions and better understand your specific sales tax risk.

Mitigating sales tax risk: Next steps

If your assessment reveals you have nexus in states where your business isn't registered, our team will help you understand your options. These may include registering through the Streamlined Sales and Use Tax Agreement (SST), or pursuing a voluntary disclosure agreement (VDA) with the state, which can limit the look-back period, reduce or waive penalties, and provide some audit protection.

No matter your situation, Avalara sales tax experts can help you understand your sales tax risk and available options.

Why get a sales tax risk assessment now?

Revenue generated from audit penalties can help bolster state coffers during periods of lower sales tax collection. In recent years, consumers are purchasing less things and more services and intangible goods, resulting in a shrinking sales tax base for states.

This shift is forcing many states to look for alternate ways to make up the difference. Digital advertising, data collection, and services are options some states are looking at, but most politicians understand that increasing taxes isn't popular with consumers.

An alternative is for states to increase scrutiny on existing businesses that may not be fulfilling their nexus obligations to collect and remit. If you're selling into states where you're not registered, you're at risk of developing an obligation to collect and remit sales tax. The more time passes, the greater your risk of a sales tax audit, penalties, and interest.

In short, you can't ensure sales tax compliance if you don't know where you have an obligation to collect and remit sales tax. A sales tax risk assessment helps eliminate uncertainty by identifying where you likely have sales tax nexus.

Start a sales tax risk assessment.