In the early months of the pandemic, states and local jurisdictions slowed their enforcement of sales tax collections from small businesses. But now that we’re finding a new norm within pandemic economic restraints, you can expect that grace period to end.
This is big news for small businesses forced online for the first time this year. According to a recent survey by Avalara, only about half of businesses are familiar with the sales tax rules for online transactions with customers in other states. If you’re new to online sales, you may not even know that the game changed two years ago with the U.S. Supreme Court decision regarding South Dakota v. Wayfair, Inc. No longer does a seller need to be physically located in a state to owe sales taxes on goods purchased in that state.
Each state has adopted (or is in the process of adopting) its own rules in this area called economic nexus. In Texas, the economic nexus threshold for owing out-of-state sales tax on goods sold is $500,000 over the preceding 12 months, but the threshold is much lower in other states. Many have adopted a threshold of $100,000 or 200 or more separate transactions in the current calendar year, for instance.
If your business jumped online this year and you have yet to understand how state-by-state sales taxes work, now is the time to wrap your head around it. Tax collectors will soon come knocking if they haven’t already.
“As state and local governments are grappling with major budget deficits over the coming year, they’re going to be diligent about collecting all the tax they’re due,” explains Forbes Senior Contributor Liz Farmer, adding that “for small business owners forced to close their doors for months and now still seeing dramatic drops in walk-in traffic, that online shift and exposure to new customers has likely been a lifeline. But it also may mean they aren’t charging the necessary sales tax on those purchases.”
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