Nexus and the Sales Tax Puzzle | Avalara (Video)

Nexus is a crucial piece of the sales tax puzzle for any business, as it determines if, when, and where you’re required to collect and remit sales tax. Simply making a certain number of sales in a state, hiring a remote employee, or attending an event can be enough to trigger nexus. If you’re not keeping track of your activities, you may be hit with fines and other penalties.

To help you better understand nexus laws and what’s required of you, watch this educational recorded webinar, cohosted by Encore Business Solutions and Avalara. You can expect to gain an understanding of the following:

• Nexus types: Physical vs. Economic
• The common activities that trigger each type of nexus
• A look at the different nexus thresholds
• Steps you can take to address any triggered nexus and how to get into compliance

This is must-know information for any business, whether you have just a physical storefront and/or sell online.

Transcript below:

Melissa: Hi there, everyone. Thanks for joining us today. This is Melissa from Encore. I’m a Marketing Specialist here. And today we have Avalara with us talking about Nexus and the Sales Tax Puzzle. So we’ve got Jammahl Sims and Larry Sheetz. I’ll hand it over to you guys.

Larry: Thank you so much. Again, my name is Larry Sheetz. I’m a Senior Sales Executive on Team Microsoft here at Avalara. Joined by my partner, Jammahl Sims. Together, we work closely with Encore. You know, if you have questions after the call, or would like to move forward with the discussion, Jammahl and I are who you’ll be working with. We’ve got a deep, close relationship with Encore, so really appreciate the opportunity.

So first, I’ll introduce Jammahl…

Jammahl: Sorry about that Larry.

Larry: No, go ahead, Jammahl.

Jammahl: I’m Jammahl Sims. I’ve been with Avalara since 2016. Started with the customer account management team. And I’ve held a couple different roles within sales and partner management. So as Larry said, you know, we’ll be working with you throughout the process. So we decided to move forward with, you know, questions with us. We both have vast experience within Avalara working with Encore. So whether you have business here in the U.S., Canada, internationally, we’re going to be able to assist you.

Larry: Thanks, Jammahl. So my name is Larry Sheetz. As I mentioned, I’ve been with Avalara since July of 2019, and have been working with Encore from day one. My prior roles were as a financial advisor with Edward Jones in the Seattle area. And prior to that, I was an officer in the Coast Guard for eight years. Jammahl and I are both in the Greater Western Washington area for anyone out this way. Yep, that’s who we are in a nutshell. And I will turn things over to Jammahl to get things started.

Jammahl: All right, so our agenda for today. So we’re just going to go over a quick overview and some of the changes for sales tax, touch a little bit on COVID and the impact it’s had on e-commerce. We’ll talk about some of the challenges that businesses face today with the collection of sales tax. We’ll talk about a path to compliance with Avalara.

And next slide there, Larry.

So complexity is growing. Let’s talk about the two differences between economic and physical nexus. So physical nexus, in a traditional sense, has always been about a physical location, an employee in a state, a warehouse, you know, or something like that. 2018, the Supreme Court ruling changed all of that when it brought about economic nexus. Your customers basically now dictate where you need to register to collect and remit sales tax, 44 of the 45 states, plus the District of Columbia with sales tax, now have economic nexus laws in place. Florida just recently enacted theirs, and that will take place. That will actually go into effect July 1. Missouri is the only state that has sales taxes, so still has not enacted economic nexus. Those rules are constantly changing. We have a tax content team that’s over 100 people strong. Very few companies have, you know, tax content teams that can keep up to date with the rules, the rate changes, the taxability of products that currently goes on. We make those changes. We’re constantly in touch with states making sure that we know exactly what a tax rate has changed to, when a boundary has changed. We update that information on the cloud and make sure that information is always up to date. And those, you know, compliance costs are constantly increasing. And that’s why we really talk to customers every day about automating with Avalara.

The burden of proof is truly on you. You know, as we said, these states change the rules constantly each and every day. And so we want to make sure that you know that there is companies like Avalara that are here to help, and we have many different ways that we’re going to show you today. Not only the complexity of tax compliance but also how automation can help. Companies or auditors like to go after the easy targets. There’s many different things that are considered low-hanging fruit. Consumer use is one of those things. Once you’re audited and, you know, you’re found you have a negative audit, you’re going to be repeatedly audited after that. And it’s not just a matter of the back taxes, but you have the penalties, the interest that goes along with that.

I was listening to Scott Peterson here at Avalara speak a few days ago. And he talked about the method that auditors use where they may go to a city and they may choose to set up four different appointments, and go out and do those audits. And then they go back and see what they can find from those audits. We don’t believe that the audits are necessarily going to get more aggressive, but we do believe that they’re going to increase in the number of audits that are being conducted.

So why now? So I touched on, you know, COVID a little bit earlier. COVID really gave a lot of businesses the need to pivot the way that they went to market. A lot of states, you know, we thought that there would be a lot larger budget deficits as far as states. We were shocked that it actually wasn’t. There wasn’t too many states that had as large a deficit in 2020, at least as we thought there would be. And a big reason for that is the economic nexus laws. They did exactly what they were set out to do. And that was to close that budget deficit gap, get some of that low-hanging fruit that was out there from remote sellers due to, you know, economic nexus. When I say we don’t see that that’s changed in 2020, that may not be the case going forward just because some of the programs that have been put in place as far as helping local businesses, the rent moratoriums, the different things that are out there right now.

And states continue to implement new laws and initiatives to collect sales tax. Marketplace fairness laws, you know, that’s essentially a law that affects just about everyone due to COVID that had to pivot the way that they went to market with economic nexus, and then of course, use tax reporting laws. That’s going to be the low-hanging fruit moving forward for a lot of these auditors.

There’s other things that also can trigger these nexus challenges: mergers, acquisitions, fundraising. You think about a lot of companies have their employees are now gone remote within these states. There’s been a handful of states that said that they won’t look into using that as a trigger for nexus in that state, where they need to register to collect and remit in that state based on not having employees there. But like anything else, that’s all in flux and it can change.

So there’s many different nexus-creating activities that you can do as a business. We get a lot of questions daily about drop shipments, you know, who’s really on the hook for collecting sales tax for the drop shipment. We have white papers. We have discussions, webinars just on drop shipments alone. Of course owned and leased property leads to nexus. Trade shows is one that a lot of people have questions about and constantly changes. There’s a reason why a lot of people go to New Orleans and they go to Las Vegas to do their trade shows. Those are two states that you can go and do business there and not have to worry about creating nexus. And then affiliates, you know, that’s one that a lot of people don’t think about. But that’s again, one that’s slowing your fruit doing business with an out-of-state vendor or an out-of-state company. Once you reach a certain threshold of business with that affiliate, that can trigger nexus.

And the thresholds vary by state. And this is really what businesses need to pay most attention to. And you can see at the top, we have a free risk sales tax risk assessment that you can take so you can see exactly where you are right now, so you can create a baseline. But these thresholds vary by state. And the one that sticks out the most is going to be Kansas, at least to me. One sale into the state of Kansas, you need to register to collect and remit. The governor of Kansas just recently vetoed a bill that would have given a safe harbor to small businesses by creating a threshold of $100,000. That was vetoed. So it’s still on the books right now, one sale into the state of Kansas, you need to register to collect and remit. And it varies by state as you can see, Georgia $100,000 or 200 in retail sales, Alabama $250,000 but it includes exempt sales. That’s one that we hear a lot. You know, all of my sales are exempt, so I don’t need to register to collect and remit. As you can see, that’s not the case. You need to make sure if you’re selling to a state, what are those totals, is it just revenue? Is it transactions? Is it a combination of both? And how do they look at exempt sales?

Larry: Great. Thanks, Jammahl. I want to take a step back here for a second and just kind of touch on how Avalara can add value. You know, Jammahl did a great job of outlining how complex the landscape is currently. We expect that to continue mainly because the South Dakota versus Wayfair Supreme Court ruling in June of 2018 was the biggest shift in the sales tax landscape in history. So a lot of states are grappling with what does all this mean for them in terms of recouping revenue, as well as requiring businesses both highly taxable businesses as well as highly exempt businesses, kind of fitting them under their umbrella to register and start collecting or at least reporting their sales in individual states. The complexity triggers from the U.S. federal government essentially saying sales tax is a states rights issue. Meaning each state with sales tax regulations on the books is allowed to determine their own requirements.

So the reason I bring that up at the beginning here is you do not need to have a firm handle on where your obligations are in order to see if Avalara is a good fit for you. We have the capability to help you with those determinations in-house. Jammahl had already mentioned the free sales tax nexus assessment, that’s just one lever that we can pull. We’ve also got a team of about a dozen former state auditors who make up our tax advisory staff, who can help you with, where are my obligations today? When did I trigger those obligations? Meaning was it this year or was it last year, the year before. We’ve seen a lot of what we call nexus expansion since COVID due to businesses thriving and surviving through the pandemic, transitioning to a major e-commerce sales channel, which opens them up to additional requirements.

So our goal at a 30,000-foot level is for us to be the experts in this and either you work with our in-house team or we’ll work with, you know, the CPA firms that you’re working with, to develop a solution that gets you into compliance today, as well as essentially future proofs your growth. So you can continue to grow into additional states without worrying about, “Ah, we really don’t want to report in these states.” And maybe add headcount, or just the burden that it takes to remain into compliance on your internal resources. We can take everything that’s not driving revenue off your plate, increase your standard of compliance, and take risk off the table.

So with all that said, some common triggers that we see for nexus in the U.S., changing ownership of the business, upgrading systems, meaning you’re on an older version of NAV or AX and transitioning to one of the new D365 offerings, things of that nature. We’ve already touched on e-commerce growth and expansion into additional states kind of going beyond the capability of your in-house staff to handle. Adding more locations, as well as increased pressure from states. Now, what does that mean? So if we go back to June of 2018, the majority of the regulations for economic nexus fell on an average of $200,000 in taxable sales, or 200 unique sales orders in a 12 month period, or a combination of the two. What we saw probably midway through 2019, as well as early 2020 was states realized that they were missing out on requiring additional highly exempt businesses from registering. So they’ve changed their thresholds from not just taxable but gross receipts, and in a lot of cases lowered that initial revenue threshold from $200,000 down to $100,000. Granted, we’re talking broad strokes here, each state has the ability to create their own requirements. But that’s just what we’ve seen, is states lowering the bar to require more businesses to register and report, as well as making sure that they’re not just focusing on taxable businesses.

So that’s my segue into the highly exempt business discussion. Traditionally, highly exempt businesses didn’t have to worry about sales tax a whole lot. They were able to keep their physical footprint small. So really only reporting in maybe one or two states. But with the changes due to the Wayfair ruling that we’ve been talking about since 2018, now, the burden on highly exempt businesses is not so much collection, but proving why you didn’t collect. And that comes back to management of your exemption certificate for your distributors, for your wholesalers, resellers, whatever the case may be. The onus now is on you to make sure that you have an efficient optimized process for not only collecting an exemption certificate but making sure you’re collecting the right form. Making sure that it’s current and valid, so that customer not only gave you the correct form but populated all the correct information, as well as giving you a tool to manage those certificates as they expire. Because like everything else sales tax-related, each individual state is allowed to develop their own requirements. For example, California does not require renewal of exemption certificates once you collect that first one, but states like Florida and Rhode Island require annual renewal. So giving you a tool of all the exemptions I have by state, which ones expire so you can be proactive. Because this falls directly into that low-hanging fruit that Jammahl was talking about.

When an auditor comes to you and says, “Great, I know most of your sales are exempt, prove to me why you didn’t have to collect.” That’s when you come over the top with, “Here are all my exemption certificates” using our platform called CertCapture. So it’s an easy process to implement, but it removes for those highly exempt businesses the vast majority of the risk that you’re looking at.

So to that end, the impact on manufacturers and wholesalers has been huge since June of 2018. What we’ve seen is going beyond just where they have physical inventory, employees, places of business, now we’re looking at businesses that have been around for decades now being forced to collect, and store, and an ongoing capacity manage an exponentially large number of exemption certificates, sometimes in the thousands. This slide is really just to illustrate the complexity of sales and use tax compliance for highly exempt businesses. But this is not a heavy lift for us to assist you with. Our tool can handle whatever volume you throw at us whether it’s 20 certificates, or 20,000. We have a solution for everybody in there to assist you with that level of compliance.

This kind of goes to show what I was speaking about of if you’re using our service for your exemptions, we guarantee that you’re going to collect the correct form every time. The tool also assists your staff in making sure that it’s filled out correctly. It’ll flag certain line items that are required by that state for that particular exemption, as well as on the back-end giving you that matrix to stay on top of it and run those proactive campaigns. The way that that typically works is customers will run email campaigns for their customers in a specific state. The way our tool functions is we provide you a email template that you customize with your letterhead with your messaging, and it has a link in that letter that directs them back. And they can populate the exact form that you require in about three to five minutes, and then stores it on our cloud system for you to access anywhere in the world. So we’re talking about reducing the amount of time devoted to this from hours, days, and weeks, especially ahead of an audit, to a matter of minutes.

So that’s just really one of our three core platforms. Jammahl referenced the first one which is tax calculation. We just walked through the second which is our exemption management. On the back-end, we can also assist you with both the state and the local sales tax preparation and filings. At a high level, all that Avalara needs to know is what states, what local jurisdictions when we talk about Colorado, Louisiana, any of the home rule states. You just tell us where to file and how frequently, and we guarantee you’re going to file on time every time, even early if you’re eligible for an early filing discount or credit. And then it’s going to be the correct method every time.

So if you think about sales tax calculations, rates are always changing how your products are viewed, and a given jurisdiction is always changing. Same holds true for the filing requirements, whether that’s the correct form, whether that’s the method of mailing in the form, faxing it in, electronic filing, as well as remittance. Do they want to check? Do they want an ACH withdrawal? All we need to know is where and how frequently, and we handle the rest. So we’ll manage your filing calendar. We’ll respond to those state tax notices as they come in. That’s as simple as you coming into your customer dashboard, uploading them, those tax notices as they come in, and we handle the rest. Our design in this is to increase the standard of compliance for your business without the associated time.

This slide goes more in-depth on that. We’re able to throw out reports looking at your data where you can extrapolate trends on a state-by-state basis for your sales, as well as those local jurisdictions, you know, if we progress to actual demonstration. We can actually show you, you can drill down in whatever filing period to an individual invoice in line item level. And you can actually glean, you know, some really competitive advantages from those reports, as well as guaranteeing that those repetitive tasks like looking up rates, checking the varying taxability, all of those major drains on your time, that also carry risk off your plate entirely. We do all those calculations in a guaranteed, accurate fashion. You won’t find that elsewhere. All in terms of four-tenths of a second on average. So this goes to show that our engine on the front end is guaranteed accurate. It will not interrupt your current business processes that are successful. What we’re doing is removing that risk and that burden on your time.

So this slide just goes to show all the different ways we can assist you. I’m sure some of you are familiar with Avalara. We’ve been around since 2004. And today we’ve been talking about our core functionality of calculations, returns, and exemption management. We can also help you determine where you need to register. We can even go more granular if say you’re a project-based business and would require some additional licenses for your business processes. We brought in through a strategic acquisition at the end of last year, businesslicenses.com, where you can basically any permit or license that you’re required to have, we can do that in-house now as part of a total solution. Same thing goes for tax research around the same time as the business license acquisition.

We acquired TTR. They’re a company made up predominantly of sales tax attorneys, and CPAs, where they will do your tax research for you if you need additional justification on how your product is viewed in a current location, creating custom rules as we need to. It’s really an enhanced capability from the tax side. And then we’re constantly adding to our nearly 1000 pre-built certified integrations, meaning, we’re designed to integrate directly into your accounting systems like Sage or Microsoft Dynamics, as well as your shopping carts, CRM tools, point of sale systems, through connectors that we’ve built in-house that we maintain in-house. And we also have the capability to give you our API if you’re using custom systems as well for all of those. So we aim to be a true end-to-end provider for all of your sales and use tax needs. We can also assist you with customs and duties, automation as well for your international sales. I’m sure some of you have experienced that headache of shipments being delayed at the border. We can dramatically improve that process as well as improve your customer’s experience with dealing with those what we call cross-border sales.

Finally, another unique capability that we can leverage around the complexity in the U.S. is the streamline sales tax organization. So if we kind of harken back to earlier in the presentation where we talked about the sales tax laws being a states rights issue, more than half of the states with sales tax on the books banded together and said, “Look, if we keep implementing our own individual requirements, this is creating an undue burden on businesses just trying to do the right thing.” So 24 of those states banded together, standardized their requirements to make things easier, and then approved certified service providers to service businesses trying to get into compliance.

So what that means for you, the end-user, is pending certain requirements we can see on the slide here at the bottom, as long as your nexus trigger is purely economic, meaning, you’ve no place of business in the state for more than 30 days in the past year, you’ve got less than $50,000 of property and payroll on the state, and less than 25% of total property and payroll in that state, you would get your compliance in up to 24 states subsidized. So it’s a great way to get the same level of compliance, but for free. It’s just something that’s unique to working with Avalara as part of any initial discussion that I have with new customers, we’ll prequalify you for that program. So what that gets you is free registrations if you’re not already registered in that state, free calculations, free filings, as well as probably most importantly, Avalara is your audit liaison if any of those 24 states come calling for an audit. So it’s a great, great program that we look to leverage as often as we can because it’s a unique capability that we offer.

Now, we’ve got a ton of resources available on our website free of charge. We’ve got a COVID-19 resource hub that will keep you up to date on the latest news and regulatory updates, specific to COVID. Sales tax nexus laws by state, so we’ve really been talking about physical presence and economic nexus today. There’s about four or five other triggers. But all of those latest and greatest rules and regulations are populated on that website that we can push out after the call today. We’ve also got, as Jammahl mentioned, fantastic marketing pieces and white papers on industry insights, as well as everything you need to know about sales tax automation in a format that’s designed to not put you to sleep. So we’ve got a ton of things we can leverage for whatever your needs may be. And Jammahl and I are standing by to assist however we can.

So that concludes Jammahl’s presentation. We’ll be happy to open it up for Q&A.

Melissa: Great, thanks to both of you. Yeah, I’ve had some questions here if you’ve got some time. So I’ll just read them out. Great.

So first one, how is SST eligibility determined?

Larry: Great question. So as part of the initial scoping, like I mentioned, we’re going to look at on a state-by-state basis, your total revenue, as well as the total number of unique orders to see if you have nexus in that state from a purely economic standpoint. The next level that we go to is, do you have any property? Do you have any places of business, remote employees, or inventory in that state, or any other states? So if the only trigger is your sales into that given state, that will serve as qualification, meaning you don’t have anybody located in that state. You don’t have a fixed place of business. And you don’t have any property or payroll, that serves as the qualification to get your compliance subsidized. So that’s all of these states, in gray here. So it’s a really unique capability. But the qualification is actually pretty easy. As long as you don’t have physical presence, you’re more than likely to qualify.

Melissa: Okay.

Jammahl: And Larry, I want to mention California, it’s not actually an SST state. That one, I’m not sure what happened to the slide there, but it’s not an SST state.

Larry: Correct. Yeah. Good call out.

Melissa: Okay, great. The next question, actually, is what states have you seen that are being more aggressive in going after businesses?

Larry: Yeah, Jammahl, I can take that one, at least to start. So we haven’t seen a ton of audit activity in 2020. And we’re attributing that to COVID. Auditors haven’t been able to come out on site. But what we have seen is a number of states have dramatically increased the number of auditors they have on staff. California, for example, between 2018 and 2019 doubled their audit workforce. Idaho did something similar. So while we haven’t seen it yet, and I think that’s more of the environmental factors due to COVID, we’re expecting that, especially with all of these states, frankly, hurting for revenue due to COVID. We’ve seen that corresponding uptick in the amount of folks that they have that will be going out once states start to reopen.

Melissa: Okay, great. Another question here, are shipping charges taxed?

Jammahl: I can take that, Larry.

Larry: Yeah, go ahead.

Jammahl: Yeah. The shipping tax, it varies by state. And that’s one of the resources, you know, that we have as part of our content team, is updating that, you know, everything is always in flux as far as these rules and regulations. We can tell you based on what it is today, and then as those change, you know, we constantly update that. So once your tax codes, you know, once you set it up and it’s matched to our tax codes within Avalara, you don’t have to worry about continually searching that out to see whether it’s changed or not. We’ll update that in the cloud and automate that process for you.

Melissa: Okay. Thanks. Another one. Do you recommend requesting a sales tax exempt certificate each year for those that you know are resale?

Larry: Yeah, I’ll just say it depends on the complexity. And it depends on how that state like the state requirement. The way that our tool functions is for those states where you have nexus, and you are required to have those exemption certificates on file. Our tool will show you based on not only the state but the type of exemption being requested, when it expires. So it takes that potentially annual project going nationwide, down to maybe I only need to get a handful of states this year, because the kind of average that we’ve seen outside of states like California, Florida, and Rhode Island, is somewhere in the three to five-year renewal. So I wouldn’t necessarily say it would be worth an annual project, you certainly can, and our tool will help you do that efficiently and quickly.

Melissa: Okay, great. And we’ve just got one more question here. So, should you use build to or ship to for determining economic nexus?

Jammahl: That’s another component that’s built into our tax engine, you know, based on the states are going to determine whether they’re an origin-based state or destination based state. So it’s not really a decision for the business to make, it’s going to be based on the state itself. And then you have states like California that are hybrid. So they’re a mix of both. So it can be, you know, very convoluted, but our tax engine does a lot of the automation.

Larry: Yeah. And it has that logic already built-in. So you don’t even need to track that anymore if you’re spending a lot of time doing it now. That’s part of our accuracy guarantee on calculations is we have those sourcing rules built-in already. So it’ll just do it in the background, guaranteed accurate every time so you don’t have to become an expert on that.

Melissa: Great. Well, that’s all we have for questions today. So it looks like we can wrap up a little bit early. And just want to let everyone know all the attendees will be getting a coffee gift card if you didn’t already see that on the notice there. And we recorded this today and we’ll be sending that out to everybody as well. So thank you so much to Larry and Jammahl for joining us today. And thanks to everyone else.

Jammahl: Thank you.

Larry: Yeah. Thanks for having us. We really appreciate the opportunity.

Melissa: Absolutely. Have a good afternoon, everyone.

Larry: Thanks. You too.