The top sales tax concerns when expanding to new markets
by February 18, 2022
This post is part of our blog series on major business milestones, see the rest of the series here. Today we’re sharing the top three sales tax components to consider before expanding to a new market.
For a company experiencing significant economic growth, there may come a time to consider moving into new markets. This could mean expanding your current customer base, adding new products or services to your existing offerings, or even honing in on a specialty of yours to hit a niche part of the market. Whatever the case – it’s an exciting time!
However, there is a lot to consider. Beyond the research, analysis, and strategy planning, there is also a sales tax component. Extending your business into new markets means you are opening a new can of compliance worms. Here are the top three sales tax components to consider before growing into a new market.
1. New nexus responsibilities
Anytime you reach new customers, you are opening yourself up to reaching new economic nexus thresholds as well. Economic nexus thresholds are specific limits set by the state, and when a seller reaches the limit, they are required to collect sales tax from their sellers. These thresholds are either a specific dollar amount or a defined number of transactions and are set by each individual state’s tax authority and vary across the country. This is important because as you expand your business, you are also expanding your revenue and the geographical area your customers are located in. Your extended customer base will have an impact on your sales tax responsibilities.
Let’s say prior to expanding, you hadn’t met Florida’s economic nexus threshold and therefore didn’t have to collect sales tax in the state. But after a successful expansion strategy specifically targeted Florida-based customers outside of your current base, your company now has economic nexus in the state. This means you are required to collect, report, and file sales tax in Florida.
This is just one state. If you are successful in expanding your customer base, there could be multiple new states that you now have sales tax responsibilities in for the first time.
It will be crucial for your company to be aware of where your new customers are located, and if you are approaching nexus in new states. TaxJar’s Nexus Insights dashboard simplifies the process with an easy-to-use dashboard that helps you monitor your nexus exposure as you transact more sales online and across more states. Additionally, the dashboard warns you when you may need to register in a new state.
2. Varying product taxability and rates
One of the more difficult aspects of sales tax compliance is the fact that not every product or service is taxed at the same rate. Even more, certain items might be taxed one way at the state level and another at the city level. When a company expands their product line, they need to consider how they tax the new offering as well.
For example, say you sell grocery items online and have sales tax nexus in Michigan, Illinois, and Alabama. If you sell a grocery item to a buyer in Michigan, you don’t need to charge sales tax since most grocery items are tax exempt in Michigan.
If you sell that same grocery item in Illinois, you are not required to collect the 6.25% state sales tax rate. However, you are required to collect the reduced sales tax rate of 1% on all grocery items.
Then say you sell that same item to a buyer in Alabama. In Alabama, grocery items are fully taxable so you’d be required to charge the state plus any local sales tax rates on that item.
You’d more than likely be required to collect a different percentage of sales tax on each of these sales. Multiply that by hundreds or thousands of sales in your e-commerce store and you have a lot of sales tax rates to calculate. See how this could get confusing?
That’s why it’s crucial to set up your online shopping cart or marketplace with the correct product tax codes. This will enable you to collect the right amount of sales tax and avoid collecting sales tax on non-taxable items.
3. Increased audit risk
States choose their sales tax audit targets with the primary goal of getting as much money as possible in as little time as possible. States and localities with few or limited revenue sources may put considerable resources into conducting sales tax audits since the resulting assessments can make up for significant revenue shortfalls.
Popular reasons companies are audited include creating nexus in a new state, the industry they are in is being audited, or a new product or offering begins showing up in reports. As your company grows and expands, it’s going to catch the attention of the state. They want to be sure they aren’t missing out on that new revenue stream either.
Audits are a part of doing business, and usually unavoidable. So what you can do is be prepared. As you expand, make sure you are following local and state sales tax regulations and keeping accurate records
