Many businesses discover their sales tax obligations only after receiving an audit notice. As director of state and local tax services at Redpath, I have helped controllers and CFOs take a proactive approach to multi-state tax compliance before problems arise.
Here are some points that I share with clients on navigating multi-state tax challenges.
The Real Sales Tax Challenge Is Not Rate Calculation
Tax calculation software solves the easy part of sales tax compliance. The true challenge lies in determining whether your products or services are taxable in each jurisdiction. Every state treats various goods and services differently. For example, Minnesota does not tax groceries, clothing or repair labor, while other states do. These variations multiply when you sell across state lines.
Three Critical Questions Every Business Must Answer
- What triggers sales tax obligations in each state? Economic nexus rules require businesses to collect sales tax once they exceed certain revenue thresholds in a state. However, physical presence through employees, contractors, or inventory still creates nexus regardless of revenue. Many businesses discover they have established nexus in multiple states without realizing it.
- Are your products or services taxable? The taxability question grows more complex with technology and services. Software platforms, digital goods, and remote services face varying treatment across states. Even similar services may face different tax treatment based on how you bill them–for example, bundled charges versus itemized invoices can affect taxability.
- Do you have proper documentation? If your customer claims a tax exemption, you must obtain and maintain valid exemption certificates. During an audit, missing certificates often result in tax assessments plus penalties and interest, even if the customer qualifies for exemption.
- Two sides of a transaction? Not only do businesses need to think about taxability of a transaction, but they also need to understand the input or purchase side of the transaction. Do I owe tax on the material or goods that I am reselling or providing under my service? Which state do I owe sales or use tax to on my purchases?
The Hidden Risk: Multiple Years of Back Taxes
One of the most serious issues I encounter involves businesses discovering they have multiple years of unpaid taxes across various states.
The impact of back taxes extends beyond the unpaid tax amounts. States assess penalties and interest from the original due dates, often resulting in total assessments several times larger than the base tax. Additionally, tax obligations can create personal liability for corporate officers in many states.
Voluntary disclosure programs offer potential relief, but timing matters. Most programs require businesses to approach the state before any contact from tax authorities. Once an audit notice arrives, voluntary disclosure options disappear. However, rushing into disclosure without understanding your full exposure across all states can create cascading problems.
Signs You Need Expert Sales Tax Guidance
The last thing any controller or CFO wants is to parse thousands of documents or receipts after a sudden audit. A specialist in sales tax strategy and policy can help if your organization is:
- Expanding sales into new states: State tax obligations extend beyond simple revenue thresholds. Each state defines nexus differently.
- Shifting from physical products to digital goods or services: States treat software, SaaS platforms, and digital services inconsistently. Some states tax all software regardless of delivery method, while others distinguish between downloaded software and cloud-based services.
- Growing revenue that may trigger economic nexus: Economic nexus thresholds vary by state and include different types of sales in their calculations. Meeting these thresholds requires immediate action - there are no grace periods for registration once you exceed them.
- Receiving an audit notice: Missing or incomplete exemption certificates represent one of the most common audit findings. States typically allow minimal time to gather supporting documentation once an audit begins.
- Learning about peer companies facing tax assessments: When states identify non-compliance in one company, they frequently expand their investigation to similar businesses.
- Uncertain about documentation requirements: Digital transformation has changed how states accept and verify exemption claims. Many states now require periodic validation and renewal of exemption certificates and mandate specific documentation for drop-shipping arrangements or marketplace sales.
- Navigating buyer and seller tax obligations across multiple states: Mishandling sales and use tax compliance puts businesses at risk of steep financial penalties, back taxes with interest, personal liability for owners, increased audit risk, and potential legal consequences.
The Value of Specialized Advisory Services
At Redpath, we take a strategic approach to sales tax consulting. Rather than just processing returns, we:
- Analyze your specific business activities and customer base
- Identify nexus triggers across jurisdictions
- Review taxability of products/services state by state
- Evaluate documentation procedures
- Assess historical exposure
- Develop compliance strategies
- Provide ongoing advisory support
Most importantly, we offer direct access to experienced professionals who understand both technical requirements and practical business realities. Unlike automated services that route everything through support tickets, our clients can call us directly with questions and receive timely, personalized guidance.
Take Action Before Problems Arise
Sales tax obligations often surface at inopportune moments–during due diligence, financing events, or audits. Proactive planning helps prevent unwelcome surprises and preserves strategic options for addressing any issues discovered.
The best time to evaluate your sales tax position is before external factors force the issue. Connect with our team at the link below to discuss your specific situation and develop an appropriate strategy for your business.