Sales Tax Review for Sales of Businesses

As a trusted advisor, ensuring your clients' compliance with sales tax regulations is crucial, particularly during the lifecycle of a business sale. Unaddressed sales tax issues can lead to unexpected liabilities, penalties, and complications in due diligence processes, which could lead to a lower selling price. If you're uncertain whether your client requires a comprehensive sales tax review—before, during, or after a sale—consider the following common indicators of potential nexus (the connection that triggers tax obligations). These apply assuming the business is not already registered and filing returns in the relevant states.

Key Indicators of Potential Sales Tax Compliance Issues

1. Physical Presence in a State

A business establishes physical nexus if it maintains a tangible presence in a state, which may include:

• Employees or contractors (including remote workers).

• Inventory storage (e.g., in warehouses or fulfillment centers like Amazon FBA).

• Ownership or leasing of real property (e.g., offices or retail spaces).

• Possession of significant personal property (e.g., equipment or vehicles).

If such presence exists without corresponding sales tax registration and filings, this could signal non-compliance, potentially resulting in back taxes, interest, and penalties.

2. Exceeding Economic Thresholds: Sales Volume

Following the 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, most states have implemented economic nexus laws. A common threshold is $100,000 in gross sales (online or in-person) into a state within a calendar year or the previous 12 months. However:

• Some states base this on taxable sales rather than gross revenue.

• Thresholds vary (e.g., higher in states like California or New York; lower or absent in others without sales tax, such as Delaware or Oregon).

• Monitoring multi-year sales data is essential, as nexus can trigger retroactively.

3. Exceeding Economic Thresholds: Transaction Volume

Approximately half of U.S. states impose nexus based on transaction counts, independent of sales dollar amounts. A typical threshold is 200 separate transactions (e.g., sales or shipments) into a state during a specified period. Even low-value transactions (under $1 each) count toward this limit, emphasizing the need for detailed sales tracking.

4. Sales of Taxable Goods or Services

All states with sales tax regimes impose it on tangible personal property (TPP), which includes physical goods and, in many cases, digital products (e.g., software downloads or streaming services). Key considerations:

• Services are generally exempt, but exceptions exist (e.g., certain consulting, repair, or data processing services in select states).

• If taxable items are sold without collecting and remitting sales tax, or if returns are not filed when required, businesses may face audits, assessments, and enforcement actions.

Additional Considerations

To provide a more holistic view, also evaluate:

• Marketplace Facilitator Rules: If your client sells through platforms like Amazon, eBay, or Etsy, the platform may handle tax collection in some states, but the business remains responsible for compliance in others.

• Affiliate or Click-Through Nexus: In states like New York or California, relationships with in-state affiliates or referral programs can create nexus.

• Exemptions and Resale Certificates: Ensure proper documentation for exempt sales (e.g., to wholesalers or nonprofits) to avoid unnecessary tax burdens.

• Multi-State Operations: Businesses operating across borders should assess nexus in all relevant jurisdictions, as rules differ significantly.

Failure to address these issues can result in substantial financial risks, including successor liability in business sales where the buyer inherits the seller's tax obligations.

Next Steps

If your client meets any of the above criteria—or if you're unsure based on their specific circumstances—please reach out to me at Kristina@cassoneconsulting.com. I would be pleased to conduct a preliminary review of your client's operations and recommend tailored solutions, such as a nexus determination study, taxability analysis, voluntary disclosure agreement (VDA) to mitigate penalties, or registration assistance.

Disclaimer: This information is for general guidance only and does not constitute legal or tax advice. Sales tax laws are complex and subject to change; consult with a qualified professional for advice specific to your client's situation.