The U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair completely changed the sales tax landscape when it opened a Pandora’s box of taxing opportunities for states.¹ For companies unfamiliar with sales tax rules, compliance can feel tricky and time-consuming.

Companies that aren’t yet compliant are at risk of sales tax audits, including potential penalties for failure to file and remit. They should consider enlisting a sales tax professional to help them ensure compliance and prevent audits.

Understanding the concept of economic nexus thresholds is critical to compliance. These thresholds vary by state and often depend on a dollar amount of sales or the number of transactions conducted within a state.

For example, California’s economic nexus threshold is $500,000 in annual sales, while Utah’s is either $100,000 in sales or 200 transactions annually. If a business exceeds these thresholds, it must register, collect, and remit sales tax in that state. Failure to monitor these thresholds can lead to non-compliance, resulting in penalties and interest on unpaid taxes. ^2, 3

Given the complexity of complying with sales tax requirements in multiple states, sales tax professionals can help companies navigate nexus and exemptions. Even businesses that use sales tax software increasingly depend on tax advisers to update their sales tax compliance in accordance with new and ever-changing standards.

In at least one case, a business was so surprised that a state sought sales tax that the owners sued their CPA for failing to advise them on the requirement to collect and remit sales tax in states outside their home state. This matter emphasizes the need for carefully drafting engagement letters to specify what services will and will not be provided. ⁴

While suing your CPA may not be the right answer, dealing with multiple sales tax audits by states where you failed to file isn’t a great result, either. For small and family-owned businesses without a broad finance staff or for CPAs with limited resources, sales tax nexus can be a trap for the unwary. This can be especially true where the nature of the business has complex rules regarding its taxability and where the taxability differs by state.

For example, cloud computing — including software as a service — is taxable in some states but not others. The same goes for information services and data processing, and the taxability may depend on the definition of those services, which also varies by state.

Even something as seemingly mundane as HVAC installation and repairs can be subject to very nuanced rules depending on the jurisdiction. For new or unique business models, the sales tax answer may not be clear. For instance, we are currently advising a client in the hospitality industry that is set up differently from other businesses. Consequently, the sales tax rules don’t directly address the situation, and the available software is inadequate.

If you want to avoid the surprise and pain of one or more sales tax audits, you should take a few steps. First, ensure your software system can identify sales by state and by customer location. Your CPA should have information on sales by state for state income and gross receipts tax compliance, so you should consider asking whether your business may have sales tax nexus in jurisdictions where it doesn’t currently collect and remit.

Next, stay proactive in managing your compliance obligations. Partnering with your CPA can help provide the insights and guidance needed to navigate this complex environment effectively. We recommend discussing your sales by state and any new service lines with your CPA annually to identify any new sales tax compliance requirements.

To mitigate sales tax exposures that you weren’t aware of, voluntary disclosure agreements can be a useful tool. VDAs allow businesses to come forward to disclose unpaid taxes in exchange for limited look-back periods and potential waivers of penalties. This can help manage liabilities and establish compliance moving forward, especially for entities looking to become the target of an M&A transaction.

Although talking to a tax person is rated only slightly above going to the dentist, ensuring compliance is worth preventing the hassle and potential costs of a sales tax audit.

This article was originally published in Bloomberg Tax.

1. "South Dakota v. Wayfair, In., 585 U.S. 162, 138 S. Ct. 2080, 201 L. Ed. 2d 403, 2018 CR 74, 86 U.S.L.W. 4452 (2018), Court Opinion," Bloomberg Law. 
2. "Use Tax Collection Requirements Based on Sales into California Due to the Wayfair Decision," California Department of Tax and Fee Administration.
3. "Sales & Use Tax," Utah State Tax Commission.
4. "Vista Horticultural, Inc. v. Johnson Price Sprinkle, PA, 2024 NCBC 62, Court Opinion," Bloomberg Law.