4 Critical Questions to Ask at Year-End About Your Organization’s Sales and Use Taxes

Sales and use taxes have been building in importance in the years since economic nexus thresholds were established in South Dakota v. Wayfair, Inc. in 2018 — making it vital for businesses to have a handle on this area of taxation. And there is no better time to assess your sales and use tax practices than at year-end. Consider the following key questions and their explanations below:

1. Do I have nexus in new states this year? 
2. Are my products and services subject to sales tax?
3. Are my customer exemption certificates up to date? 
4. Am I filing use tax returns?

1. Nexus Evaluations

The last few years have brought unthinkable challenges to businesses navigating through a pandemic and into a post-pandemic world. The sales tax nexus landscape was already in a state of flux prior to 2020. Businesses struggled with newly enacted economic nexus thresholds and their accompanying compliance requirements. Then came the pandemic, forcing organizations to pivot to remote work environments, monitoring both economic thresholds and a remote workforce to identify new nexus states. 

As the world moves into a post-pandemic environment, many businesses have permanently adopted remote or hybrid work models. The challenges faced during the pandemic to identify sales tax nexus are now part of normal business operations. In addition to payroll and sales considerations, if you have expanded operations into new geographic areas, you will have physical presence nexus in new states as well. 

Include the following questions as part of your year-end review related to nexus evaluations:

• Do you have any new physical locations?
• Do you have any employees in new states?
• Do your sales exceed $100,000 in states where they previously did not?
  • While there are exceptions, like California and New York, most states require sales tax to be collected if a business has more than $100,000 of sales sourced to the state. Reviewing sales by state for the recently completed year can help you identify states seeing increased sales activity and where you may have met economic nexus thresholds. 

If any of these situations apply to you, you will want to take steps to ensure proper compliance with state sales tax collection obligations. This may involve business registrations, vendor’s license (sales tax) registrations, use tax registrations, and beginning to collect and remit sales tax. 

2. Taxability and Rate Determinations

After your business determines it has nexus in a state, you will need to determine the taxability of your products and services. Generally, states impose sales tax on retail sales of tangible personal property and enumerated services. States may provide exemptions based upon the usage of the product/service or the nature of the customer. 

Taxability rules vary by state, with the same product taxable in one state and non-taxable in another. For example, sales of electronically delivered software are not taxable in California but are taxable in Pennsylvania. Due to the varied taxability rules, it’s important to review how taxability determinations are made. Many businesses are moving toward tax automation to handle taxability determinations, while others rely on tax matrices. Regardless of how you do it, you should review and update your tax determinations annually.

If you determine the product or service is subject to sales tax, then you will need to determine the correct sales tax rate to include on invoices. State sales tax rates are easier to maintain; however, local rates are subject to change frequently and create significant challenges. In addition, states can apply special rates to certain products or services. 

Make sure to have your procedures in place to address taxability and rates. If your business does not have the resources internally to properly address taxability and rates, you may want to consider outsourcing your sales tax function.

3. Customer Exemption Certificates

The validity of exemption certificates is a frequent concern for businesses: whether it be state audits or a sale of the business, exemption certificates have never been under more scrutiny. Starting the new year off with proper exemption certificates can save you headaches in the future. 

• Confirm Exemption Certificates are in Place
  • You’ll want to confirm you have sales tax exemption certificates in hand for all customers to which you do not charge sales tax. States vary on how close to the sales date you need to obtain an exemption certificate. As part of the new customer onboarding process, it is a best practice to request an exemption certificate from all new customers, if applicable. This ensures future sales will be covered by the certificate. 
• Confirm Proper Exemption Certificate is Received 
  • Once a customer provides you with an exemption certificate, your organization will want to confirm it is properly executed. There are many reasons an exemption certificate could be determined invalid:
    • Incorrect business name listed on exemption certificate
    • Customer signature missing from exemption certificate
    • Stated reason for exemption is invalid (either not an applicable exemption or customer is not entitled to exemption)
    • Customer provided an improper exemption certificate, meaning they provided:
      • A single transaction exemption certificate instead of a blanket exemption certificate, which covers all transactions between parties; or
      • An exemption certificate for the wrong exemption (for example, a resale exemption certificate instead of a manufacturing exemption).
• Confirm Exemption Certificate is Still Valid
  • States have different time horizons for which exemption certificates are valid, some as little as one year. It is best to know for how long each certificate is valid so proper requests can be made to obtain them timely. A good practice is to ensure you are getting a new exemption certificate at least every three years. This can be more easily accomplished by taking the vendor base and putting it into three groups, then obtaining exemption certificates for one group each year. 

Evaluating sales and use tax nexus and sales tax exemption certificates is a great step to add to any year-end review. Ensuring policies in these areas will help ensure smoother audits and fewer sales and use tax surprises. 

4. Use Tax

When a vendor does not charge sales tax on a taxable sale, it becomes the purchaser’s obligation to remit use tax on the sale. Use tax is a complementary tax to the sales tax. Like product/service taxability determinations, you should evaluate your business purchases to confirm tax is applicable. If you determine purchases are not taxable, you should provide proper documentation, e.g., exemption certificates, to vendors. If they are taxable, remit use tax to the state in which the benefit of the taxable sale will be received. Year-end is a great time to evaluate where you are filing use tax returns and if you need to add any states to the list. Filing use tax returns in all states in which you have purchases, even if it is a zero-tax due return, is a good idea to establish a filing history. In case of a state audit, having an established filing history will help limit the amount of time a state can go back and look to assess tax.


As sales and use tax continue becoming a more prominent force in our new work world, use the end of the year to evaluate your business obligations so you can start off the new year on the right foot!

Contact Mike Fink at mfink@cohencpa.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.