Key takeaways
- Start with the sales by state, not with the state where the business is headquartered.
- Check both physical presence and the state's economic nexus threshold.
- Separate marketplace sales from direct sales, because the marketplace may collect the tax.
- Document the review and the decision, even when the answer is not to register.
Start with the sales by state
Pull the sales by state and by jurisdiction for the last twelve months. The total sales are not enough; the review needs the taxable sales and the transaction count for each state.
Separate the direct sales from the marketplace sales. A marketplace may collect and remit the tax on its sales, and those sales may not count the same way toward the seller's threshold.
Use the sales records, not the bank deposits. A deposit can include shipping, tax collected or a refund, and it does not show where the sale happened.
Check physical presence
Physical presence includes an office, warehouse, store, employee, contractor, inventory or equipment in the state. It can be temporary, such as a contractor working in the state for a month.
List each state where the business has a person, property or inventory, and the date the presence started. A single employee can create nexus even when the sales are small.
Physical presence is separate from the economic threshold. A business with a physical presence may need to register even when its sales are below the state's economic threshold.
Check the economic thresholds
Each state sets its own economic nexus threshold, and some states count transactions as well as dollars. The thresholds change, so check the state's current guidance before deciding.
Measure the sales over the period the state uses, which may be the previous calendar year or the current year. A business that crossed the threshold in the current year may need to register before the next period.
Keep the calculation with the review. A threshold decision that cannot be explained is a decision the firm cannot defend in an audit.
Review marketplace sales
A marketplace facilitator may be required to collect and remit the tax on sales it facilitates. The seller may still have a registration or filing obligation in the state.
Get the marketplace reports and check whether the marketplace collected the tax. Do not assume the marketplace handled every sale; a direct sale through the seller's website is separate.
Keep the marketplace reports with the review. They are the support for the sales the seller did not report.
Register and file
If the business has nexus, register in the state and set the filing frequency. The state may require a deposit or a bond, and the registration may take longer than the first sale.
Set up the filing calendar and the payment method. A registration without a filing process creates a late return and a penalty.
If the business has been selling without registering, discuss the exposure with the client and the firm's tax advisor before filing. The options depend on the state and the facts.
Collect exemption certificates
For each customer that claims a resale or exemption, collect a valid certificate for the state and the type of purchase. A certificate from another state may not support the exemption.
Keep the certificate with the invoice and the transaction record. The certificate is the support for the exempt sale in an audit.
Review the certificates before filing and update them when the customer's details change.
Document the review
Write a short memo that lists the states reviewed, the sales and transaction counts, the physical presence, the marketplace sales and the decision for each state.
Keep the memo with the sales reports and the registration records. The memo is the firm's evidence that the review happened and the decision was reasoned.
Review the analysis every year or when the business enters a new state, adds a marketplace or crosses a threshold.