Integrating TaxJar to the ERP system

Handling taxes is an essential aspect of running your business, yet it can be complex. TaxJar simplifies this process by automating your most tedious tasks, such as:

• precisely calculating sales tax rates

• classifying products

• Managing multi-state filings.

We incorporated the TaxJar system into our NetSuite ERP system to streamline and enhance the efficiency of these processes.

To grasp the complexity of the Tax subject, let's comprehend the foundational elements.

First of all, the concept of Nexus

To determine in which U.S. states your distribution business has "Nexus" for tax purposes, you need to examine several factors. Nexus is the connection or presence your business has in a particular state, which requires it to register, collect, and remit Sales Tax to that state, and sometimes also pay State Income Tax.

The rules for determining nexus vary from state to state, but generally, nexus is established based on two main types of connections:

1. Physical Presence Nexus: This is the traditional basis for determining nexus. A business is considered to have physical nexus in a state if it has:

   • Physical Location: An office, store, warehouse, distribution center, etc.

   • Employees: Hired employees, independent contractors, sales representatives, technicians, etc., who work regularly or significantly in the state (even if working from home).

   • Inventory: Holding inventory in the state, even if it's held in a third-party warehouse (like Amazon FBA - Fulfillment by Amazon).

   • Assets: Owning or leasing tangible property or real estate in the state.

   • Marketing/Sales Activities: Regular participation in trade shows for sales purposes, or regularly sending sales representatives into the state.

   • Agents or Representatives: Using independent agents or representatives acting on your behalf in the state.

2. Economic Nexus: Following the Supreme Court ruling in South Dakota v. Wayfair (2018), many states enacted laws establishing nexus even without a physical presence, based on a certain level of economic activity in the state. The rules vary, but typically include one or both of the following thresholds (during the previous 12 months or the current/prior calendar year):

   • Sales Threshold: Total gross sales into the state exceeding a certain amount (often $100,000, but can differ in some states).

   • Transaction Threshold: The number of separate transactions into the state exceeding a certain number (often 200 transactions, but this also varies).

   Important: You must check the exact thresholds in each state you sell to, as they are not uniform. Some states use only the sales threshold, others use both, and the amounts and number of transactions can vary.

What does it mean that my business has Nexus in a specific state?

Having nexus in a particular state makes your business a "taxpayer" in that state and places an active responsibility on you to comply with its tax laws, including registration, collection, reporting, and payment of relevant taxes. Ignoring these obligations can be very costly. Therefore, it is crucial to correctly identify the states where you have nexus and act accordingly.

1. Duty to Collect and Remit Sales Tax:

   • This is the most common and immediate implication, especially given economic nexus laws.

   • If you have nexus in a state, you are required to register with that state's tax authority (usually the Department of Revenue) to obtain a Sales Tax Permit/ID.

   • After registration, you must collect the applicable state (and sometimes local - county/city) sales tax from customers in that state on taxable sales (according to that state's laws).

   • You must file periodic sales tax returns (monthly, quarterly, or annually, depending on the state and sales volume) and remit the tax you collected to the state's tax authorities.

   • Important: Sales tax rates and rules regarding which products/services are taxable vary greatly from state to state, and even within states.

2. Potential Duty to Pay State Income Tax or Franchise Tax:

   • In many states, having nexus (especially physical nexus, but increasingly economic nexus as well) requires the business to pay income tax on the profits generated from activities within that state.

   • This means you must file a state income tax return in that state and pay tax on the portion of your income that is "apportioned" to that state, usually based on a formula considering sales, property, and payroll within the state.

   • Some states levy a "Franchise Tax" instead of or in addition to income tax, which is sometimes based on net worth, revenue, or other metrics.

3. Additional Registration and Reporting Obligations:

   • Beyond registering for sales tax and income tax, you might be required to register as a "Foreign Entity" doing business in the state.

   • There may be other reporting requirements to various state agencies.

4. Exposure to Penalties and Interest:

   • Failure to comply with obligations arising from nexus (like failing to register, collect, or remit taxes) can lead to the assessment of back taxes retroactively, plus significant penalties and interest for the period you were obligated but did not comply.

What TaxJar Can Do regarding Nexus and Sales Tax:

1. Economic Nexus Monitoring:

   • Tracking Sales & Transaction Thresholds: TaxJar can connect to your sales platforms (like Shopify, Amazon, WooCommerce, eBay, etc.) and automatically track your total sales and transaction counts in each state.

   • Alerts: The system will notify you when you are approaching or have crossed the economic nexus thresholds (sales or transaction thresholds) in various states. This helps you know when you need to start concerning yourself with registration and tax collection in that state.

   • Important: It's primarily good for monitoring economic nexus. It won't automatically know about physical nexus (like a new employee location or warehouse) unless you input that information or it receives it via integration (e.g., Amazon FBA warehouse locations).

2. Accurate Real-time Sales Tax Calculation:

   • Complex Rate Calculation: This is one of TaxJar's key strengths. The system calculates the correct sales tax rate for each transaction, considering the customer's precise address (down to the state, county, city, and sometimes special tax district levels - there are over 14,000 tax jurisdictions in the U.S.).

   • Product Taxability Rules: It can account for varying rules about which products are taxable in different states (e.g., clothing might be exempt up to a certain amount in some states, food might be exempt or taxed at a reduced rate, digital services are taxable in some states, etc.). This requires proper setup of your product categories.

   • Integration: It integrates directly with your shopping cart or e-commerce platform to apply the correct tax at checkout.

3. Data Consolidation and Reporting:

   • Data Aggregation: TaxJar centralizes all sales and tax collected (or should have been collected) data from all your connected channels.

   • State-Specific Reports: It generates detailed reports showing exactly how much sales tax was collected in each state and jurisdiction, in a format that simplifies filing with tax authorities. The reports show total sales, taxable sales, exemptions, and tax collected.

4. Automated Filing and Payment (AutoFile):

   • Filing Service: This is a feature (often at an additional cost) where TaxJar can file your periodic sales tax returns for you in the states where you are registered and even make the payment to the tax authorities on your behalf, charging your payment method. This saves time and reduces the risk of forgetting to file on time.