Economic Nexus & Sales Tax Issue

95% of distributors have risk in this area and we now know how the States will find you!

Most of our FCFO clients are disregarding state sales tax nexus issues and are racking up significant liabilities. One large distributor client is out of compliance in over 25 states and faces a $1 million liability – ouch! And compliance is relatively inexpensive compared to the potential risk.
John Byron, owner of Prosperity Promotions, engaged our FCFO team to complete our exploratory audit so that he could understand the status of his finances. Sales tax liability is one of the many topics we review, and Prosperity was out of compliance in multiple states. Our FCFO team coached the Prosperity team and assisted in getting them registered and compliant.

The most common feedback we get from distributor owners and Controllers is “well I’m not too worried about it – I mean, how will California find me if my business is located in NY?”. Here’s how they found one of our clients – the State of California conducted a routine sales tax audit on a large tech company in California. They noticed many invoices from an out-of-state promotional product distributor that didn’t charge sales tax. This triggered an investigation of the distributor, who was found to be out of compliance. Now the distributor is faced with paying back taxes they didn’t even collect, in addition to fines, penalties, etc.
And the risk doesn’t go away with time, it only grows. If you are a larger distributor that hopes to sell your business as an ongoing concern, as opposed to an asset sale, this issue will be found during due diligence and will interrupt or delay your sale. And if you are selling the assets of your business, you will retain this outstanding liability, even after the sale of your business. Who needs a sales tax audit during retirement?

The good news is that maintaining compliance is not difficult and costs relatively little compared to the risk.

Your Controller will have a one-time project to determine which states require your compliance and then registering with each state is just paperwork. You’ll then have a monthly remittance report to run, just like you do in your home state. Compliance requirements vary by state, but Avalara has a nice report that tells you which states require your compliance. If your Controller doesn’t have the time to fill in the monthly reports, Avalara will even do that for you, albeit at a cost.

Ignoring your economic nexus requirements comes with risk, and as John Byron says, “I’m too pretty for prison”! 😊