The only guarantees in life are death and taxes. But mostly taxes.
This is even more true for businesses – especially businesses operating in multiple states. This was the case recently at Hutchinson, Black and Cook with a client seeking support navigating the complex tax obligations of businesses with operations in multiple states.
The business had recently made the financially-painful discovery that it was delinquent in registering for sales tax collection outside its home state of Colorado. The Colorado-based remote business didn’t have the in-state employees, offices or inventory that, before 2018, would have shielded it from registration and collection requirements in other states. Unsurprisingly, this new client – like many growing businesses – was unaware of the 2018 Supreme Court decision in South Dakota v. Wayfair that allowed states to force e-commerce and remote retailers to register and collect state tax, provided the vendor had sufficient “economic nexus” in the taxing jurisdiction.
To clarify, if the multi-state operation sold enough product or service into a state – in many states the threshold is $100,000 in sales and/or 200 transactions – the business was deemed to have triggered economic nexus. When a business reaches this threshold, it is obliged to register with the state’s tax department and collect sales tax from in-state customers.
Obviously, this tax obligation can be a tremendous compliance burden and should be anticipated well in advance of hitting a state’s economic nexus thresholds. But the complexity doesn’t end there. As the client learned by working with the HBC tax law team, there are even more tax considerations for businesses operating out-of-state. For example, in addition to the economic nexus threshold, businesses that store inventory or retain out-of-state employees need to be aware that having product or an employee in another state results in physical nexus and requires the same registration and sales tax collection obligation. This is less of a concern if the business is selling wholesale or the services it performs are not taxable in the state, but each state has unique sales and use tax rules so compliance is often a mine field for the unwary.
HBC was able to work with this client to uncover – and then prepare – for all the potential tax obligations. That included working through the additional complexity created by the state of Colorado’s patchwork of overlapping home-rule cities, statutory cities, regional districts, counties and other local taxing jurisdictions, each with its own set of laws and regulations.
Unfortunately, it is not uncommon for businesses to be unaware of these tax obligations. States now have greater power to hold remote businesses responsible for sales tax registration and collection duties, so HBC recommends a full review for all its business clients that engage in transactions in other jurisdictions. As this business would attest, it is vital to have an experienced team of tax law experts on your side.