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Why It Pays to File Business Tax Returns Correctly


It's not tax season quite yet, but you may already be fielding questions from small business owners regarding income and sales tax nexus -- and whether they really need to file tax returns this year. Business tax expert David M. Donnelly breaks down the sales tax rules as decided by Wayfair in 2018 and explains why it behooves those filing business taxes to be diligent. 

Sep 30th 2021
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Whether you have an existing business or you are starting one, congratulate yourself—in any business environment, this is no easy feat. However, in the time of COVID-19, it’s even harder. But while you focus on sales and operations, do not forget the tax man. You may think that you already have too much to do, let alone worry about taxes. But don’t think this way!

In the tax world, there is a term called “nexus.” It loosely refers to the ability of a taxing jurisdiction to bring you into their world, i.e., make you subject to taxes. In the old days (before e-commerce), nexus was usually based on physical presence, meaning you had to have a brick-and-mortar location with employees, etc., or you had to be sending in salespeople to do more than mere solicitation in order to have a filing requirement.

In 2018, the Supreme Court decided South Dakota v. Wayfair, Inc. in favor of the state of South Dakota. Following that decision, retailers with annual in-state sales exceeding $100,000 or 200 separate transactions must collect sales tax and file sales tax returns with that state. This is for retailers that are located both inside and outside the state. It’s crazy, but it’s true!

The above relates to sales tax, but what about income/franchise tax? If your business is a corporation or LLC, it was formed under the laws of a particular state. At a minimum, you must file an annual return in that state. But what if you have locations in other states, such as a factory or warehouse? What if you have employees going into that other state or have meaningful sales there? In those cases, you might have to file there.

Sales tax is a trust fund tax. As a business owner, the sales tax you collect is held in trust and then remitted; for example, when a customer goes to a restaurant and receives a $100 bill for food and drink, there will most likely be a few additional dollars for sales tax. These additional dollars need to be collected by you and then remitted to the taxing authority. If they are not, you and/or any other “responsible person” will be personally liable. A business, its owners and responsible parties that fail to collect and remit sales tax quite often find themselves out of business or bankrupt.

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