As They Adapt to the COVID-19 Landscape, Small Businesses Face Major Tax Nexus Compliance Hurdles

Co-authored by David Harrison, Senior Accountant, CPA, JD

For nearly a year, COVID-19 has battered the global economy, taking its toll on American businesses along the way. Over 30 million small businesses nationwide are now endeavoring to rejuvenate sales from the effects of a disrupted global supply chain and public lockdowns. At the same time, they are challenged to implement practices to protect their employees, customers, and the community from the spread of COVID-19. These practices often include a component allowing employees to work from home, or in different offices. If the weight of that burden wasn’t enough, these changes in where and how business gets done lead to new challenges in the form of tax compliance. In the summer of 2018, the Supreme Court’s ruling in South Dakota vs. Wayfair overturned the existing minimum standard of nexus by physical presence. Two years later, the American economy is still adjusting to the magnitude of that decision. (More information on the South Dakota vs. Wayfair decision can be found here.) 

What is Tax Nexus?

Tax nexus is the amount of contact a business must have with a taxing jurisdiction (state, city, etc.) before that jurisdiction may subject the business to the jurisdictions’ tax rules. The primary way businesses create nexus with a jurisdiction is by having employees or business property physically located in that jurisdiction. This means businesses may have major tax compliance changes when they move employees off-site through remote working arrangements due to COVID-19. Having an employee who was working in an office located in one jurisdiction, but who now works from her/his home, which is located in a different jurisdiction, may create tax nexus in the employee’s home jurisdiction. Many, but not all, states and some cities have COVID-19 relief provisions, protecting businesses who temporarily moved employees due to COVID-19. These protections are typically only temporary, and do not apply to permanent remote working arrangements.

On top of this, the United States is still in the midst of a massive change in tax nexus law. As a result of South Dakota vs. Wayfair, businesses do not need a physical presence in a state to be subject to that state’s sales tax (and potentially other taxes as well) – economic presence is enough. As a result of the pandemic, e-commerce and remote sales have surged nationwide. While many physical/storefront businesses have been forced to close their doors, others have embraced online retail offerings in an attempt to salvage revenue. The ensuing response saw a 30 percent increase in sales tax collections in many states. Following the impact of South Dakota vs. Wayfair, many businesses are now subject to new sales tax collection, registration, and remittance obligations as they increase sales into states where they do not have a physical presence. Guidance is important, now more than ever, as businesses are beginning to receive sales tax audit notices as a result of nexus generating activity. This surge in sales tax liabilities, in conjunction with a spike in activity from state auditors, means small businesses face numerous risks related to tax compliance.

What are the risks, and how do you mitigate them?

Back taxes, interest, failure-to-file penalties, under-collected taxes, taxes collected without remittance, and a lack of consistent and thorough nexus reviews, are a few of the major risks threatening small businesses. A State and Local Tax (SALT) expert can provide invaluable planning, audit support, compliance services, and automation consulting that mitigates risk for small businesses in regard to sales, use, income, franchise and gross receipts taxes. Ultimately, these services provide cost savings as a result of compliance accuracy, reduced audit exposure, increased bandwidth and better allocation of resources. SALT experts maintain strong relationships with state and local authorities. With a vast and deeply rooted knowledge of state and local tax expertise, these specialists improve efficiencies through the introduction and implementation of new processes, procedures, and technologies.

VonLehman’s team of specialized SALT consultants is proactively supporting clients during this uncertain time. If your business is lacking adequate guidance as it relates to sales and use tax, or state and local tax in general, contact VonLehman today to learn how our consultants can mitigate risk and protect your business through the ever-changing tax landscape.

Robin Teeters, Senior Manager, CPA, VonLehman SALT Lead
rteeters@vlcpa.com  |  800.887.0437

David Harrison, Senior Accountant, CPA, JD, SALT team member
dharrison@vlcpa.com  |  800.887.0437