The June 2018 U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc. reshaped the landscape of sales tax obligations across the United States, ushering in the era of economic nexus. This landmark decision overturned the previous requirement of physical presence for establishing nexus, opening the door for states to enact economic nexus legislation. Alongside this shift, a new focus on the concept of trailing nexus emerged, presenting a continuation of tax obligations even after a business no longer meets the nexus criteria.

In this article, we’ll define economic nexus and trailing nexus, and how the two may dictate your tax obligations regarding the states in which you operate. Here’s what we’ll cover:

Understanding Economic Nexus and Thresholds: Discusses economic nexus thresholds and varying state regulations.
What Is Trailing Nexus? Defines trailing nexus.
Examples of Trailing Nexus Policies: Explores examples of trailing nexus policies by state.
Practical Considerations for Businesses: Discusses tips on how to handle trailing nexus in your state.
Not what you’re looking for? Let’s talk. Reach out to us at info@milesconsultinggroup.com.

1. Understanding Economic Nexus and Thresholds
Economic nexus, as per the nexus definition, refers to the connection between a business and a state based on economic activity rather than physical presence. Each state sets its own threshold for economic nexus, determining when a business is required to collect and remit sales tax. For instance, in Arkansas, the nexus law sets the threshold at $100,000 in sales or 200 separate transactions, whereas in California, it’s $500,000. These thresholds vary significantly from state to state, adding complexity to sales tax compliance for businesses operating across multiple jurisdictions.
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The R&D tax credit is a governmental incentive designed to encourage research and development activities in the US. This credit offers a dollar-for-dollar reduction on federal taxes for qualified expenses related to developing new or improved products, processes, software, technique, formula, or invention.

Although claiming this credit can offer considerable benefits for companies engaged in Research and Development efforts, the process is not without its challenges. Three Common Challenges You May Face while Claiming R&D Tax Credits:

Documentation of Qualified Activities and Expenses

Insufficient documentation is a common challenge with the R&D tax credit. Accurately identifying what constitutes a qualifying R&D activity and having the proper support can be challenging for taxpayers. It is important that the taxpayer implements a system for maintaining records and documentation. While R&D activities must meet specific criteria related to developing new or improved products, processes, or software, having a robust record keeping process is important

Companies must keep track of their activities and expenses and make sure they are tied to the qualifying activities while adhering to IRS regulations
Updates to R&D Tax Credit Law

The R&D Tax Code is complex, and lack of awareness and understanding is a common challenge for the taxpayer. Staying informed of any updates in tax legislation is crucial. Being up to date ensures an understanding of how changes to the code might affect your company’s qualifying R&D activities

To overcome the challenge of ever-changing tax laws, taxpayers should engage experts who specialize in R&D tax credits.

Staying Compliant and Audit Ready
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Tax compliance significantly affects your business’s financial health and customer relationships. Understanding the taxability of your products or services is essential for smooth business operations. Here’s why accurately determining the taxability of your offerings is vital to your business’s success.

Legal Compliance and Avoidance of Penalties
Adhering to Regulations: Each state and country has specific tax laws that dictate which products and services are taxable. Failure to comply with these laws can result in significant penalties, fines, and interest on unpaid taxes. By determining the taxability of your offerings, you ensure that your business complies with all applicable tax regulations.
Avoiding Legal Disputes: Incorrectly charging or failing to charge sales tax can lead to legal disputes with tax authorities. These disputes can be time-consuming and costly and have the potential to harm your business’s reputation and operations. Properly determining taxability helps avoid these legal complications.

Financial Health and Cash Flow Management
Accurate Pricing: Understanding the taxability of your products or services allows you to set accurate prices that include the appropriate tax amounts. This ensures that your pricing strategy is transparent and aligns with your financial goals.

Preventing Unplanned Expenses: If you fail to collect the correct sales tax amount from customers, your business may have to cover the shortfall. This can lead to unexpected expenses and a negative impact on your cash flow. Proper taxability determination helps you collect the right amount upfront, avoiding financial surprises.
Customer Relations and Trust

Transparency with Customers: Customers expect pricing transparency, including applicable taxes. Accurately determining and displaying tax amounts builds trust with your customers, as they can see that your business is honest and compliant with tax laws.
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In the evolving landscape of state taxation, companies must navigate the complexities of sales and use tax nexus. With the surge of e-commerce and remote work, a comprehensive understanding of both economic and physical nexus becomes a powerful tool to ensure compliance and streamlined business operations.

What Is Nexus?

In the context of state taxation, Nexus refers to the connection or link between a business and a state that justifies the state’s authority to impose tax obligations on the business. Traditionally, this connection was based on a physical presence, but the advent of digital commerce has led to the adoption of economic nexus standards by many states.

Physical Sales and Use Tax Nexus

Physical nexus is established when a business has a tangible presence in a state. This can include:

Office Locations: Having an office or any other place of business in the state.
Employees: Employing workers who reside or work in the state.
Inventory and Warehousing: Storing inventory or goods in a warehouse located in the state.
Property: Owning or leasing property in the state, including real estate and tangible personal property.
Sales Representatives: Having sales representatives, agents, or contractors operating in the state.
Physical presence has traditionally been the primary criterion for establishing nexus, ensuring that businesses with a substantial and tangible connection to a state contribute to its tax base.

Economic Sales and Use Tax Nexus

In the digital age, economic nexus has emerged as a pivotal concept in state taxation. It is based on the economic activity a business conducts within a state, regardless of physical presence. This concept gained prominence following the landmark 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., which upheld the state’s right to impose sales tax obligations on out-of-state sellers based on economic thresholds, marking a significant shift in state taxation practices.
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After thirty years and more than one thousand tax executive searches, we have learned quite a few lessons in the tax executive search profession. This article is about the lessons we have learned repeatedly. By learning these lessons in advance, you will benefit from this knowledge on your next tax executive search. As CFOs work to contain costs at multinational organizations, they often minimize recruiting fees in their tax department budgets. This is a costly mistake in the long run because doing so companies block their access to an extraordinary pool of tax professional talent that will not submit their resume to an online ad or a company portal. The reason is tax professionals desire greater privacy when considering a new tax opportunity. This hidden population of tax executive candidates can only be introduced the old fashioned way, by retaining a tax recruiter to cold call hundreds of tax executives about your tax opportunity. There is a significant difference in the talent pool available to a company when they retain a recruiter to go out and conduct a thorough search of the marketplace for talented tax candidates.

There is a positive impact on an organization who chooses to conduct a thorough search by an experienced tax recruiter, versus conducting a search on your own. There is a difference in tax savings to an organization whenever they invest in attracting the best of the tax profession to their tax organization. Investing in your tax team will have a positive financial impact on your company. The CFOs I have worked with over the years who treat their tax executives like Gods and Goddesses know their inhouse tax teams are saving millions(billions) of dollars to the company bottom line every year or over a ten year period. One tax executive I know came up with more than one billion in savings over a ten year period on an IP strategy. The company would have been charged over one billion US tax dollars by the country tax revenue authorities over ten years if they had overlooked this tax savings opportunity. CFOs supporting their tax leaders with the staff and budget they need to operate proactively are knocking it out of the ballpark with tax strategy home runs. However, management needs to support their inhouse tax team to produce a treasure chest of tax savings opportunities for the company. The idiom “penny-wise, pound foolish” is often used to describe something that is done to save a small amount of money now but will cost a large amount of money in the future.” This idiom is the best way to describe the difference between retaining an experienced tax recruiter or conducting a tax executive search on your own.

Conducting A Tax Executive Search On Your Own

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A nexus study and taxability review determine where a company might have state tax exposure and the extent of that exposure. We work with our clients to identify their activities in various states and analyze the types of transactions engaged in within those jurisdictions.

Determining exposure before a proposed acquisition is good business. We also assist in determining possible exposure before a state comes to audit. And finally, we bridge the gap with respect to financial statement disclosure.

As part of each project, we work with clients to answer the following types of questions:

• What is nexus?
  • Do we have physical presence nexus?
  • Do we have economic nexus?
• Is my product or service taxable?
• Are there any available exemptions (e,g, food or medical exemptions, sales to qualified non-profit entities)?
• Must I start collecting and remitting sales and use tax?
• I’ve collected tax from a given state and have not remitted it-what now?

Once we determine possible exposure, we assist clients in receiving maximum benefit from available amnesty programs, contract for voluntary disclosure agreements, work with their customers to determine if they have self-assessed taxes (and can therefore reduce exposure for our client) or simply document their exposure.

Economic Nexus

In the United States, the sales tax landscape drastically changed due to the U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc. In June 2018, the High Court made a landmark decision that it is constitutional for the State of South Dakota to enact an economic nexus law. This established precedent and paved the way for states to establish additional ways companies may establish nexus in their jurisdiction.

Now all states which impose a state level sales tax (as well as some local jurisdictions) have enacted economic nexus laws. As a result, companies must now consider both their physical footprint (employees offices, inventory) and the level of sales activity they have in a given state. Once nexus has been established companies need to consider registering for sales tax, collecting and remitting tax, and then filing tax returns. We call that “compliance.”

What Is Economic Nexus?

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Amending Sales And Use Tax Returns

What Are The Current Rules?

For businesses operating in multiple states, keeping up with State and Local Tax (SALT) compliance can feel like a never-ending puzzle. And when a notice for a  SALT audit lands in your in-box, with its deep dive into your tax filings and business activities, it can all seem too much to handle. But with the right preparation and plan and partners to assist you, it’s  possible to sail through the audit.

Understanding SALT Audits

In this article, we’re generally talking about a “SALT audit” as  a thorough review conducted by state or local tax authorities in a given state to verify that businesses have accurately reported and remitted taxes, which can include sales tax, use tax, or income tax . Audits can also be related to payroll taxes or personal property taxes, but our focus in this article is on the sales tax audit.

Each state has its own rules, meaning that businesses operating in multiple states must navigate a web of differing requirements. An audit usually begins with a formal notice from the state, followed by the auditor’s request for records. The process can span weeks or months, depending on the scope of your operations.

This article breaks down how to prepare for a SALT audit, including the key phases to ensure compliance and avoid costly penalties.

Here’s what you can find out:

1. Self-Audit (Regular Internal Audit) – Before the audit

• Organize Your Records: Ensure all tax and financial documents are accurate and complete.
• Assess Your Risk: Identify potential issues in your sales and use tax processes and proactively review and correct tax records
• Expert Assistance: Consult with a tax professional for guidance.

2. Pre-Audit (Preparing for the Audit)
   

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