How many sales and use tax jurisdictions are there in the United States? Well over 11,000. Each jurisdiction will have multiple tax rates depending on the goods or services sold. And this web of compliance becomes even more dense and entangled for remote sellers.
Here’s why: Approximately 30 states impose taxation on digital services, but few tax them across the board. Some states tax online sellers narrowly, exempting most digital services but applying tax to digital goods (apps and e-books). However, 16 states at the time of this writing generally exempt digital goods and services from sales tax.
Navigating the intricacies of US tax laws can be likened to Alice’s journey through Wonderland, where every twist and turn reveals a new and bewildering world of rules and regulations.
Ready to jump down the rabbit hole?
What is Tax Jurisdiction?
Tax jurisdiction refers to the geographical or legal area where a government or taxing authority can impose and collect taxes. It defines the boundaries or limits within which specific tax laws, rates, and regulations apply. Tax jurisdiction can encompass various levels of government, including federal, state or provincial, county or local, and even special taxing districts.
What is the jurisdiction code?
A tax jurisdiction code is a unique identifier or code assigned to a specific geographic area or jurisdiction where tax rules, rates, and regulations are applied. Tax authorities, businesses, and individuals use these codes to determine the appropriate tax jurisdiction for a transaction or tax-related activity.
Factors influencing tax jurisdiction for business owners
A combination of factors influences the tax jurisdiction of US business owners and companies trading in the United States. They can be complex, dynamic, and varied. Understanding them is crucial for complying with tax laws and optimizing a company’s tax position.
1. Corporate tax residence
Is your corporation classified as “domestic” or “foreign” for US federal income tax purposes? That will be the biggest (but not only) factor in determining the extent of the United States tax jurisdiction over your corporation.
Ditto for US companies. In which state is your organization headquartered? It matters to the authorities because each state in the U.S. has its tax laws and regulations, including income tax, sales tax, and property tax. Therefore, a business must adhere to the state(s) tax laws.
One last thing to note. Domestic corporations are subject to US tax jurisdiction on their worldwide income. In contrast, foreign corporations may be subject to US tax jurisdiction if they have a taxable presence in the United States.
2. State of incorporation
The physical location of a business’s operations plays a central role in its tax return by determining its jurisdiction. But the state in which it is incorporated matters, too. For instance, Delaware, Nevada, and Wyoming are popular choices for incorporation due to their business-friendly tax laws. However, if a business is incorporated in one state but operating in another, it must navigate the tax laws of both jurisdictions.
3. Sales tax and economic nexus
The South Dakota v. Wayfair 2018 U.S. Supreme Court decision impacted tax jurisdiction for business owners in a big way. Due to Wayfair, states can expect remote out-of-state sellers to collect sales tax if they trigger economic nexus within the state.
For business owners, the decision has expanded their responsibilities to collect sales taxes on out-of-state transactions, and they must now comply with the sales tax laws of each state in which they do business.
4. Income tax nexus
Apart from sales tax, income tax obligations depend on a business’s nexus in a particular state. Nexus can be established through physical presence, economic activity, or other factors. Companies with operations, employees, or substantial sales in a state may have income tax obligations there.
5. Location of sales
Where you’re making your sales is another factor impacting your tax jurisdiction. If a business makes sales in a state, it may be subject to that state’s tax jurisdiction, regardless of whether it has a physical presence or economic nexus.
Types of Tax Jurisdiction
According to the Tax Foundation, the United States has one of the most complex tax systems in the world, with over 10 million words in the federal tax code and thousands of different tax jurisdictions at the state and local levels.
Why is our tax jurisdiction system as complex and fragmented as the Mad Hatter? We have approximately 11,000 different tax jurisdictions due to the combination of federal, state, and local tax authorities, each imposing separate tax laws and regulations. Plus, the US tax landscape is constantly evolving, as the Wayfair decision has shown.
Ready to keep journeying down the rabbit hole of the world’s most mind-bending tax compliance landscape?
Next stop: categories of tax jurisdictions.
State tax jurisdiction
State tax jurisdiction refers to the authority of a state to impose taxes on individuals and businesses within its borders. Each state has its tax laws and rates, and companies must comply with each state’s tax laws in which they do business.
County tax Jurisdiction
This refers to the authority of a county to impose taxes on individuals and businesses within its borders. Counties may impose multiple levels of tariffs on various goods and services, such as sales tax, property tax, and hotel occupancy tax.
City tax jurisdiction
City tax jurisdiction refers to the authority of a city to impose taxes on individuals and businesses within its borders. Like counties, municipalities may also impose tariffs on various goods and services, such as sales tax, property tax, and hotel occupancy tax.
Special taxing districts
Special taxing districts are local government units created to provide specific services, such as fire protection, water and sewer, and transportation. A special taxing district may tax individuals and businesses within their borders to fund these services.
Why is determining tax jurisdiction so important?
It’s a compliance thing
Ensuring accurate tax jurisdiction determination helps businesses comply with the tax laws, jurisdiction codes, and regulations of the jurisdictions in which they operate. Staying on the right side of state and local compliance officers is essential to avoid legal issues and financial penalties.
It mitigates the risk of fines, audits, and legal issues
When a business violates tax jurisdiction laws, the consequences can be significant. For example, the cost of a company not complying with economic nexus laws can include the company being required to pay uncollected taxes, which can be a significant financial burden. The business also may be subject to fines and interest charges for late or incorrect filings or payments. Lastly, the company may be subject to legal issues, including audits and legal action.
It saves time and resources in the long run
Businesses that accurately determine tax jurisdiction can avoid costly audits and resource-draining legal issues mentioned above. These penalties can vary in severity but often involve additional fines plus potential interest payments.
Reputation and operational damage
Customers usually take their business elsewhere when they find out a company has failed to meet its tax obligations. Partners may follow them out the door. The bad news can leak on social media. Competitors may talk about it during sales calls. Talking heads may discuss it on podcasts, LinkedIn articles, and news networks.
We’ve just hit rock bottom of the tax jurisdiction rabbit hole.
Fortunately, it’s time to begin climbing towards the light.
Seven ways Complyt can improve your tax jurisdiction management
Businesses of all sizes trading in the US must stay up-to-date on the latest tax laws and regulations to comply with them. This can be a daunting task, but there are several things you can do to improve their tax jurisdiction management.
1. Still using zip codes to find your tax jurisdiction? (That’s so 2010)
ZIP codes don’t always align with your sales tax jurisdictions. How come? A single ZIP code may be subject to multiple sales tax rates, or a single tax rate may apply to multiple ZIP codes. That’s why today’s most streamlined, compliance-ready online sellers use geolocation technology. It’s way more accurate at pinpointing the location of a customer’s address to determine the applicable sales tax rate.
Complyt uses geolocation technology to obtain the sales tax jurisdiction for each transaction, ensuring businesses accurately register, calculate, and report their sales tax liability.
2. We monitor your risk exposure to constantly changing US tax laws 24/7
Mistakes are beautiful. It’s how we grow and learn and human experience. But, it has no place regarding an organization’s tax compliance duties. That’s why an automated tax compliance platform is the meat and potatoes of any compliance strategy.
To err is human, and to forgive is divine. Accurate and complete records of your sales invoices and transactions are the bricks and mortar. It will help you account for and track your tax liability and comply with the relevant jurisdictions’ tax laws.
Tax laws are constantly changing, so it is vital for businesses to stay informed about the latest developments. Complyt provides businesses with up-to-date information on tax laws and regulations, alerts, and notifications about changes.
Complyt’s superpower is helping businesses automate their tax compliance functions from end to end, ensuring their sales and transactions are accurately tracked and reported.
Integrate a tax compliance calendar into your accounting systems
This helps you stay on top of tax filing deadlines. The calendar should include the due dates for all of the taxes that the business is required to file, as well as the steps to be taken to file those taxes.
Complyt’s tax compliance calendar instantly integrates seamlessly with any ERP, HR, and billing system.
Seek professional guidance
Businesses should seek professional guidance from a tax advisor if they have questions about tax jurisdiction or compliance. A tax advisor can help companies understand the relevant jurisdictions’ tax laws and develop a tax compliance plan. Our team of tax experts can help with that, too.
Monitor economic nexus thresholds
One of Complyt’s most robust features is the ability to help businesses track their economic nexus status and ensure they comply with the law across all fifty states in real-time.
Train staff on the procedures needed to stay compliant
This helps ensure that everyone in the company knows their responsibilities and complies with the law. We can provide your business with training materials and support to help train your staff on our tax compliance platform, no matter where your company is registered.
Conduct regular compliance audits
Companies should perform routine compliance audits to adhere to the tax laws of pertinent jurisdictions. These audits pinpoint possible compliance discrepancies and facilitate corrective measures before they escalate into significant issues. Complyt can assist organizations in automating this process, making it more efficient and streamlined.
Embrace automation and technology
Several software solutions on the market can help businesses to automate their tax compliance processes. With Complyt, you can calculate, file, and remit sales and tax returns effortlessly with one compliance platform.
With Complyt, tax jurisdiction won’t trip you up
Tax compliance is anything but simple, which is why simplicity is the thing companies love most about our platform. Book a demo or contact the sales team for additional information.
Or book your free tax assessment with a Complyt tax expert now.
