Changing economic nexus requirements demand a technological solution

Keeping up in today’s tax world is increasingly difficult. Internally, you’re working on repetitive and time-consuming compliance and audit work with little time for strategic and value-add activities. You may struggle to plan responses to market disruptors like changing regulation.  Maybe even your neighboring business units, like finance and marketing, are investing in technology to keep up and stay current — but is tax?

With nexus decided by different thresholds in different jurisdictions, retailers now must manage nexus requirements across all 50 states, rather than only those in which they have physical operations. Add in retailers’ widespread use of drop shipping, and the situation becomes even more complicated. For retailers that do business digitally, software tools are essential to staying in compliance with states’ various tax requirements.

To begin to understand the relevant sales and use tax requirements, retailers should start by asking a host of questions:

• Where are you selling?
• Where are your products shipped from?
• Who collects sales tax?
• Where is the sales tax due?
• Where does my company have nexus?
• Where does my drop shipper have nexus?
• Where is the customer located?
• Can an exemption certificate be applied?

Even simple transactions aren’t simple

To better understand how the answers to these questions are inter-related, consider a relatively simple transaction between a retailer, a customer, and a drop shipper.

If the retailer, drop shipper, and customer are all located in the same state, or all have nexus in that state, the tax treatment is relatively straightforward. If neither the retailer nor the drop shipper has nexus in the state, the tax treatment may also be simple. In that case, neither the retailer nor the drop shipper is responsible for collecting tax on the sale. The customer is subject to use tax on the purchase unless an exemption applies.

However, a drop shipment can involve multiple states, multiple retailers, and can easily create tax liability in more than one state. The obligations of the various parties depend on the specific details. Say a customer in California places an order with a retailer based in Colorado, and the retailer uses a drop shipper based in Texas. In this situation, the participants need to know where they have nexus, where they qualify for exemption, where tax is charged, and how they are responsible. 

Let’s start with the retailer’s perspective. If, as a retailer, your drop-shipper has nexus in a ship-to state where you do not have nexus, you may need to register in the state where your customer resides. That’s because, currently, nine states do not accept home state retail certificates. In those cases – if you can’t provide a certificate to your drop shipper – you may need to register in that state.

From the drop-shipper point of view, the lack of a valid exemption certificate can also create headaches. If the drop-shipper has nexus in the state where the customer resides – but doesn’t have an exemption certificate – then it may be required to administer sales tax on the transaction.  

Drop-shipped transactions can be far more complicated than this. Even a relatively simple transaction, of the sort outlined above, leads to additional requirements for managing compliance. There is the management of multiple certificates, each of which may have different durations and different expiration dates. Not all software can handle and track the certificates associated with multi-state transactions properly.

In addition, each state has passed varying provisions for remote seller nexus. This places a burden on the retailer to track their activities in detail. Once the remote seller nexus threshold is reached in a given state, the retailer may need to start collecting tax immediately. For example, if the threshold for nexus is $100,000 on gross receipts, the state may expect a retailer to be able to automatically turn on collections at the click of a button. 

Using technology to manage nexus requirements

Staying on top of the many changing nexus requirements and determining how they affect one’s ever-evolving business can be a cumbersome and onerous task. The right technology package can remove a substantial part of the burden.  Software will help you effectively manage changing nexus requirements, certificate management, state registrations, and how likely your own business is to meet remote seller nexus requirements in any particular state. Although it is simplest to talk about nexus on the state level, your software should also reach down to the local level, where multiple jurisdictions have enacted their own rules, even when the state itself doesn’t impose a sales tax. A hosted solution can help businesses stay compliant in the face of these multiplying corporate tax challenges. Leveraging technology allows a retailer to spend more of their time, energy, and ingenuity building a stronger, smarter business.