The excitement of year’s end can push all kinds of taxes to the back of your mind. But it’s a good idea to look out for how a new year can mean new sales tax obligations for you and your online business.
Here are some common situations that can be exciting for your business and distracting for you – and that can create sales tax risk. What should you watch for in 2025?
Sales growth or sales into new states: Sales and use tax obligations are determined by your nexus within a state or tax jurisdiction. The immediate wake of Black Friday, Cyber Monday and the rest of the ever-burgeoning holiday online shopping season is a good time to make sure that thrill growth in your sales won’t ignite economic nexus for you in various states and tax jurisdictions. (We generally recommend that companies begin monitoring their nexus requirements when sales reach $100,000 in a state.)
After that, start 2025 by establishing a system to monitor your obligations, including a calendar of where you’re registered for sales tax purposes, the filing frequency of each return and other state-specific information, including tracking and handling notices from tax jurisdictions.
Product expansion: Many companies like to start the year with a bang of new products and services. Keep on top of the taxability of your new offerings in states where you have six-figure sales.
Generally, states require sales tax on tangible personal property. Services are frequently excluded (“frequently” doesn’t mean “always”). Technology products/services can also be complex, especially if tech companies claim they provide “professional services,” a term states often limit to such fields as engineering, medical, law and accounting.
New employees, locations or warehouses: Any of these additions to your business can create a physical presence, an overlooked but still potent way that your sales tax obligations can mushroom.
What defines “physical presence” for nexus? States can assert sales tax nexus on your business if in a jurisdiction you have even one office or just a mailing address; employees, affiliates, service personnel, independent contractors or sales representatives; multiple in-person sales meetings or presentations; or company-owned delivery vehicles (excluding standard delivery services).
Two other contemporary online sales trends might cause you to accidentally create physical nexus. Employees working out of their homes or outside (remote workers) your home state is a growing one. Post-pandemic, about one in three workers still work from home, and states seem to be getting more aggressive in using remote workers to leverage all kinds of tax collection.
Do you sell on Amazon and similar marketplace facilitator platforms? Several of the biggest facilitators might store your goods in a warehouse in a state that no one in your company has ever set foot in. You nevertheless might still face the challenge of having created physical nexus.
Though some states (such as Pennsylvania) have determined that an Amazon warehouse creates no physical nexus or special sales tax obligation for online sellers, this trend bears watching in the coming year.
Change of staff: Who left your company in 2024? If it was a sales tax expert, making somehow replacing them a priority for 2025.
Our recent survey showed that a big portion of companies still handle sales tax obligations in house, but accounting positions are increasing difficult to fill as enrollments continue to decline in college accounting programs and retirement takes its toll on an aging professional workforce. More than one in four respondents to our survey also said they already couldn’t keep up with the constant change in sales tax.
Leaving these key positions vacant can result in a lack of bandwidth or expertise to manage sales tax – inviting non-compliance.
Audits: Just as you develop a system to track sales tax obligations, you should also make it a priority for 2025 to keep tabs on audit notices.
Top reasons why sales tax audits occurred included missing resale certificates, not charging tax on taxable products, missing sales tax permits and calculating tax incorrectly. Our annual sales tax survey of top finance execs showed that though most respondents (85%) had already gone through a sales and use tax audit, there was a growing lack of confidence in audit preparedness in more than one in every five respondents. Almost half of respondents said they’re unprepared or only somewhat prepared for an audit.
The new year is a good time to get ready for an eventual audit. Review your nexus and taxability and such paperwork as your sales tax returns, federal income tax returns, G/Ls and sales journals. Have your records organized and clear.
You can prepare for an audit in other ways, too. Earmark insignificant items for disclosure before an auditor asks, which could result in less scrutiny of the rest of your sales and use tax obligations. Earmark other, more
significant records and put them aside to present only if the auditor asks. Start screening your employees for the one – and only one – of your staff who will work with an auditor for all questions and information requests.
(Also see our eBook about how to prepare your company for a potential audit)
The new year is full of opportunity – and comes with minimal risk of sales tax non-compliance if you begin preparing now.
TaxConnex can help your business stay on top of your sales tax compliance in the new year and well beyond. Get in touch to learn how we can help you.
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