Sales Tax Compliance | Sales Tax Exemptions | OH IN KY

Sales Tax Compliance | A Deep Dive into the Details

Published on by Cheryl Ganim in Consulting, State Local Tax

Sales Tax Compliance | A Deep Dive into the Details

The Supreme Court’s landmark 2018 ruling in the South Dakota V. Wayfair case changed the rules for when out-of-state businesses across a wide range of industries are required to collect and remit sales tax. (surprise – it’s not just retail!).

What the Wayfair ruling changed

Prior to the ruling, businesses that had a physical presence in a state were required to collect state and local sales tax. States followed suit with South Dakota after the Supreme Court ruling and modified their regulations to require sales tax filing when a significant economic presence, or “nexus” exists – a huge change further complicated by the fact each state (and even some local jurisdictions) sets their own rules for when nexus is established.

How nexus works

Once a business exceeds a state’s threshold for economic presence in a state, states mandate that the out-of-state business registers and begins to collect and remit sales tax. Economic nexus thresholds are generally $100,000 of total sales into a state, but that amount varies among states.

Detailed planning helps business leadership understand if their products and/or services are taxable or exempt by state, update invoice presentation, and educate their sales staff. The sales force and other employees would be tasked with collecting customer exemption certificates in order to make tax-exempt sales. Often the IT staff are involved with the software configuration.

Companies with nexus are also required to pay the state use tax on taxable items that are purchased tax-free and used by the business in the state. Occasionally, companies make purchases that are taxable from a vendor who did not charge sales tax, and use tax is inadvertently overlooked. Having processes in place to identify taxable purchases is a best practice to have in place to avoid audit penalties and interest.

What are sales tax exemptions?

A sales tax exemption form is a state-issued permit that allows an organization to purchase tangible personal property or certain services tax-free. For example, say a manufacturer has a sales tax exemption for purchasing items used in the manufacturing process. The manufacturer does not pay sales tax on manufacturing materials, rather, sales tax is paid by the end-user unless they also have an exemption.

Keeping track of customer exemption certificates is a critical step in ensuring your business is in compliance with sales and use tax collection requirements.

Common sales tax pitfalls

Sales tax exemption records

Having incomplete or missing sales tax exemption certificates from customers, or failing to collect sales tax when it’s required, are common exposure areas businesses face. This is an avoidable area of vulnerability that often surfaces during an audit.

Nexus study

If your business is selling into multiple states, or selling into the U.S. from a foreign country, sales tax compliance can become more challenging to manage. There are thousands of jurisdictions across the U.S. that have varying sales tax rates that are updated periodically.

The business may exceed the economic nexus threshold in a new state during the year. The company may have employees working in new states, or have property used or stored in new states. A periodic analysis of factors that may cause your business to have a sales tax filing requirement is recommended.

Advantages of automation

Automation of the sales tax compliance process helps businesses reduce tax exposure by ensuring up-to-date sales tax rates are used, sales tax returns are timely filed, and reduces risk associated with employee turnover. Outsourcing and automating the sales tax process removes the manual input and enables your employees to spend time on other value-added projects. An advisor with sales tax expertise can provide guidance on state sales tax requirements, product taxability, nexus, and guide your company through the software integration with the business’ accounting system.

Related content

You might also be interested in more about common sales tax compliance issues and how to avoid them or get more detail on nexus. You can also take our  2-minute Sales Tax Compliance QuickTest. Our sales tax compliance team will review your responses and contact you with recommended next steps.

Contact Us

If you need assistance with sales tax compliance or have questions, our team of top sales tax compliance pros is here to help. Contact us today for a free consultation and get started on your journey to greater peace of mind.


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