Tax compliance starts with simple answers to complex questions

If you work in tax compliance, you know what you’re up against. The tax research required to keep a business tax compliant is often tedious, time-consuming, even downright maddening. You can spend a full day scouring statutes and department of revenue resources in search of the most up-to-date answer to a pressing tax question, only to emerge bleary-eyed and empty-handed.

It happens all the time, because tax compliance requirements are often byzantine and messy and subject to change. For instance:

• Products and services are subject to different, changeable sales tax rules
• Sales tax exemptions can be highly nuanced 
• Cross-border sales create new tax compliance challenges 
• Tax returns need to be right
• Audits happen

Taxes probably aren’t going anywhere, but the tax research required to understand requirements and be in compliance can become less onerous by combining tax expertise with technology. Read on to learn more.  

For the most part, U.S. states tax what they want, how they want. 

While most tangible personal property is subject to sales tax in most states, there are exceptions to that rule. And although most states exempt most services, that’s not the case in Hawaii, New Mexico, or South Dakota. Numerous states tax some types of services but not others. 

It’s hard to make generalizations about sales tax laws because generalizations are antithetical to the nature of sales tax. That’s why it’s so important to research the sales tax requirements specific to each state.

Consider the following.

Clothing is taxable in many states, but Minnesota and Pennsylvania exempt most (but not all) apparel, and whether clothing is taxable or exempt in Massachusetts depends on how much an item costs. In New York, clothing is generally exempt from state sales tax but subject to local sales tax in some parts of the state.

While more than 30 states generally exempt food, it can be surprisingly difficult to determine whether certain products are “food,” “prepared food,” or something else under sales and use tax law. Many states tax candy differently from other food, and many tax a Kit Kat differently from an M&M. Arkansas taxes food and food ingredients at a reduced rate, but taxes soft drinks at the general rate, as well as some sweetened fruit and vegetable juices.

The taxability of digital goods and services can also be hard to get right, as some states have yet to provide clear guidelines for these transactions. And since sellers may not acquire a customer’s address for sales of intangible goods, it can be hard to know how to source these sales. 

Sales tax holidays are another bugbear, especially in Florida, which has taken to offering a half-dozen or more overlapping tax-free periods. More than 20 states have at least one sales tax holiday scheduled for 2024. If you sell eligible products to consumers in any of these states, it’s critical to know when the tax-free periods start and stop, how sales tax holidays affect layaway sales, and more.

And as if dealing with statewide tax rules wasn’t hard enough, in home-rule states like Alabama, Colorado, and Louisiana, taxability rules for products and services can differ from city to city or county to county.

As you probably know, many businesses are required to collect and remit sales tax in multiple states, including states where they have no physical presence. Any business that meets a state’s economic nexus threshold, which can be as low as $100,000 in annual sales or 200 transactions in a year, must register and comply with all applicable sales and use tax laws in that state. This is true whether the business is based in the neighboring state, on the other side of the nation, or in a different country.

The farther removed you are from a state, and the more states you need to account for, the harder tax accuracy becomes. Hunting down taxability rules is a hassle: State tax websites sometimes don’t update or remove outdated content in a timely fashion, and they don’t always provide adequate guidance in advance of a taxability change. You can ask questions, but getting an answer may take time you don’t necessarily have. 

The solution: Avalara Tax Research is a web-based application that provides clear answers to your tax research questions, backed by relevant laws. The solution’s nexus map alone is worth its weight in gold, as it provides at-a-glance sales tax nexus requirements for every state in the Union. 

Avalara Tax Research also puts product taxability laws and regulations at your fingertips, as well as relevant department of revenue rulings. You can use the solution to find the tax rules that govern the products you sell in all states where you do business, rather than scouring 50 different tax department websites. Think of the time savings that alone could bring.

One of the things that makes sales tax endlessly fascinating and frustrating is that every state’s sales tax laws are unique. Laws and regulations related to sales-tax-exempt transactions, in particular, tend to be highly nuanced.

No state can tax direct sales to the federal government, but the similarities between states end there. As the Sales Tax Institute notes, “Some states specifically include an exemption for sales to the Federal Government. Others simply exempt sales that they are prohibited from taxing under the U.S. Constitution.” Even where direct sales are exempt, sales to government contractors or employees may be taxable.

Sales to a state government may or may not be exempt, depending on the state. Florida and Texas provide an exemption for the state government, for instance, but California and Washington do not. Whether the exemption extends to the government of another state also varies.

Local government agencies and schools may or may not be exempt too. In Florida, school districts may make tax-exempt purchases of goods and services necessary for parent-teacher organizations (PTOs) and parent-teacher associations (PTAs) only if funds for the purchase are provided by the PTO or PTA. In California and Washington, schools are generally required to pay sales tax on their purchases.

In addition to exempting some sales to or by certain government agencies and nonprofits, states also provide full or partial exemption for a host of manufacturing inputs, machinery and equipment, and so much more. 

Unless a transaction is statutorily exempt, the seller is required to collect a valid exemption certificate or resale certificate from the purchaser at the point of sale. Any business that cannot validate an exempt sale with the proper certificate could be held liable for the uncollected tax. For their part, purchasers also must be able to prove they qualify for their exempt purchases, otherwise they may be liable for the equivalent use tax.

Locating the laws and regulations that govern tax-exempt sales can be extremely challenging. Avalara Tax Research makes finding information much less frustrating. If you sell tangible goods to nonprofit religious institutions in six states, for example, you can search for information related to selling tangible goods to nonprofit religious institutions in those six states. If you need to connect with a tax expert, you can. You won’t have to spend time learning to navigate all six department of revenue websites because Avalara Tax Research will give you the information you need along with the origin of that information. It’s a huge time-saver.

Any business selling into the United States can establish an obligation to collect sales and use tax, including businesses based in Canada, Mexico, and Europe. For many such businesses, learning to navigate U.S. sales and use tax is extremely challenging. After all, sales tax is quite different from value-added tax (VAT) and goods and services tax (GST).

As noted above, your business can be required to collect and remit sales tax in states where you don’t have a physical presence. If you have a connection to a state sufficient enough to establish nexus, you’ll be required to register for sales tax, collect sales tax on all taxable transactions, validate exempt sales with a valid exemption certificate, and file and remit sales tax on time.

Where to start? You should definitely bookmark the state tax authority website (e.g., the California Department of Tax and Fee Administration or the New York State Department of Taxation and Finance), as it contains helpful information and all the required forms. But since finding the information you’re looking for on a state website can be challenging, you may want the additional support provided by Avalara Tax Research. 

The nexus map will let you know, at a glance, the sales tax nexus laws in effect in each state. In addition to establishing nexus as a result of economic activity (i.e., economic nexus), it’s possible to trigger nexus through ties to in-state affiliates (affiliate nexus). A number of states also still have click-through nexus laws on the books, which generally have a much lower threshold than economic nexus laws. 

You can also find product taxability rules, rate information, and sales tax return due dates through Avalara Tax Research. And if you have questions, you can ask tax experts and know you’ll get reliable answers.

Tax return due dates vary by state. Within a state, filing due dates often depend on your volume of sales. A business that conducts a few sales in a 12-month period may only need to file annual returns, while a business with a high volume of high-value sales may be required to make accelerated sales tax payments on top of monthly returns.

And that’s just the start. Many states require businesses to file an amended return when an overpayment is discovered, though specific requirements vary. Most states require businesses to file returns even when there was no tax due for the reporting period. Different states provide different discounts for filing sales tax returns on time or early.

No matter where your business is based or what type of business you’re in, if you’re registered for sales and use tax in a state, you’ve got to be sales tax compliant. Getting your sales tax returns right is an essential step, and Avalara Tax Research can help you succeed by helping you find the right information.

There’s a good chance at least one state will audit your business at some point, even if you cross all your t’s and dot all your i’s. Like it or not, audits happen.

If audit issues arise, Avalara Tax Research can help you find relevant tax information and citations to help you understand what you got wrong. You may even find something that can help you challenge an assessment and reduce your liability. 

Even more important, Avalara Tax Research can help reduce the likelihood of a negative audit finding by helping you achieve tax compliance from the get-go. 

It takes a village to get tax compliance right, or a heckuva lot of work, at the very least. 

Relying on one person or even a team of people to undertake tax research can be time-consuming and therefore expensive. Outsourcing to an accounting firm can be even more expensive.

Avalara Tax Research combines the expertise of humans with the efficiencies of technology to provide peace of mind for the businesses that use it. It can help even inexperienced members of your team understand the underlying principles of sales tax compliance: the statutes, the department of revenue guidance, and litigation surrounding certain requirements. It can deepen your organization’s sales tax knowledge in the long run, improving overall tax accuracy (taxuracy?) for your business.

Avalara Tax Research isn’t just another tool. It’s a curated library tailored for tax, finance, and accounting teams and has the backing of Avalara expert researchers. In a world where tax rules shift continuously, think of it as updated, reliable, and your team’s go-to reference. It’s the resource your finance and accounting team needs to enhance tax compliance accuracy.

Learn more about Avalara Tax Research.