How Sales Tax Works for Distributors – Will’s Whiteboard

How growth strategies for distributors can trigger new sales tax obligations (and what you can do to prepare).


Hi, welcome to Will’s Whiteboard. I'm Will. With the U.S. economy on the upswing, many, many distributors are looking for ways to increase market share and gain competitive advantage. But what so many distributors don't realize is that some of the tactics they're using to do this can actually create new types of sales tax risk. That's the subject of today's video. We're going to look at three ways distributors are seeking to grow, and sales tax risks that can come along with each.

Okay. One of the ways distributors are looking to gain market share is by hiring more sales reps. This is to do things like increase brand awareness, bring in new sales opportunities and get into new regions. But what many businesses don't realize is that a lot of activities that reps engage in can create a new obligation for you to collect sales tax in a jurisdiction where you didn't have to collect before.

So a few examples, if you've got reps attending trade shows, if you've got reps making occasional sales in the states where you don't currently collect, or if you hire a rep in another state and they telecommute. All of these activities can, in some cases, create the obligation for you to register and deal with sales tax in those states. Now, the list of these nexus-creating activities goes on and on as states are hungry to increase their revenue.

Another way that distributors are currently looking to grow and gain market share is through mergers and acquisitions. For larger distributors, they're in a little bit of a buy rather than build mentality a lot of the time. So they will look to acquire or merge with a smaller company in order to get into new geographies or business segments.

But if you do this, merger and acquisition, you can inherit additional sales tax compliance regulations that you have to deal with. Compliance can become more complex for your business. On the flip side, if you're a smaller company and you're looking to maybe get acquired or there's a pending merger, often in the due diligence process, sales tax exposure is something that will be looked at. If you have a lot of risk and you don't have a great handle on compliance, this could actually impede a deal from going through.

Third growth strategy, e-commerce. Lots of your distributors are turning to the internet to be able to sell directly to their customers online. But this can expose the fact that you may not have the best exemption certificate or reseller's Certificate Management System.

Do you have the ability to collect certs from customers instantaneously online when you make a sale? If not, what are you doing? Are you making them fax in documents? This can really get in the way of sales. So as you can see, growth activities can bring with them new levels and layers of sales tax complexity. Something like sales tax automation can really help you scale while not having to worry so much about sales tax risk. For example, Avalara's Avatax keeps track of rules and rates in all jurisdictions where you need to worry about sales tax. So as you move into new territories, it's got you covered.

Also, Avalara Cert Capture puts exemption certificate management in the cloud for you. So if you're doing e-commerce, you can collect certs online. It makes it easy to manage your exemption certificates wherever you're doing business.

I hope this helps you understand areas of sales tax risk that might crop up for you and gives you a way to help deal with that. Thanks very much. I'll talk to you next time.