Not all states are equal. The 10 trickiest states for filing sales tax

Navigating the landscape of sales tax regulations across different states in the United States can be a daunting task for businesses of all sizes. While sales tax laws vary from state to state, some states stand out for their particularly complex and challenging tax systems. In this exploration, we delve into the top 10 states known for their intricate sales tax requirements, shedding light on the unique complexities that businesses encounter when filing sales tax returns.

From California's diverse tax rates to Florida's myriad exemptions and exclusions, each state presents its own set of challenges and considerations for businesses aiming to stay compliant. Join us as we uncover the intricacies of sales tax filing in these 10 trickiest states, offering insights and guidance to help businesses navigate the complexities of state and local tax laws with confidence and clarity.

California: California's sales tax system is notoriously complex due to its vast economy and diverse tax laws. With numerous sales tax rates and special district taxes, determining the correct rate for each transaction can be challenging. Additionally, California has unique rules regarding tax exemptions and deductions, further complicating the filing process.

New York: New York's sales tax laws are among the most intricate in the country. The state imposes different tax rates for various goods and services, making it difficult for businesses to navigate. Moreover, New York has a relatively high sales tax rate compared to other states, adding to the complexity for businesses operating within its borders.

Texas: While Texas has a state sales tax rate, local jurisdictions can also impose additional taxes, leading to varying rates within the state. This decentralized tax structure can be confusing for businesses, especially those operating in multiple locations across Texas. Understanding Texas's unique rules regarding tax exemptions and deductions is also essential for compliance.

Florida: Florida's sales tax laws feature numerous exemptions and exclusions, making compliance challenging for businesses. Navigating these exemptions requires careful attention to detail to ensure accurate reporting. Additionally, Florida's sales tax rate is relatively high, further complicating the filing process for businesses operating in the state.

Illinois: Illinois imposes a high state sales tax rate and has complex rules regarding exemptions and deductions. Businesses must navigate these rules carefully to avoid errors in their tax filings. Furthermore, Illinois taxes some services, adding an extra layer of complexity to its sales tax system.

Pennsylvania: Pennsylvania's sales tax laws are complicated by its state sales tax rate and additional taxes imposed by local jurisdictions. Businesses operating in Pennsylvania must understand these varying tax rates and comply with the state's rules regarding exemptions and deductions. Failure to do so can result in penalties and fines.

Washington: Washington's sales tax system is unique due to its Business and Occupation (B&O) tax, which applies to gross receipts rather than sales transactions. This system can be confusing for businesses, particularly those unfamiliar with Washington's tax laws. Additionally, Washington imposes sales tax on some services, further complicating compliance for businesses operating in the state.

Ohio: Ohio has a state sales tax rate, but local jurisdictions can also levy additional taxes, leading to variations in tax rates across the state. Understanding Ohio's rules regarding exemptions and deductions is essential for businesses to ensure compliance with the law. Additionally, Ohio's sales tax laws are subject to change, requiring businesses to stay updated on any developments that may affect their tax obligations.

Louisiana: Louisiana's sales tax system is characterized by its high state sales tax rate and complex rules regarding exemptions and deductions. Businesses must navigate these rules carefully to ensure compliance with the law. Moreover, Louisiana imposes sales tax on some services, adding to the complexity of its tax system.

Colorado: Colorado's sales tax laws can be challenging for businesses due to its state sales tax rate and additional taxes imposed by local jurisdictions. Understanding the varying tax rates and rules regarding exemptions and deductions is essential for compliance. Additionally, Colorado's sales tax laws apply to online sales, further complicating the filing process for businesses operating in the state.

Expanded nexus

Sales tax nexus is the connection between a taxing jurisdiction and a business that triggers a sales tax collection obligation for the business. It used to be based on physical presence alone. However, on June 21, 2018, the Supreme Court of the United States overruled the physical presence requirement in its decision in South Dakota v. Wayfair, Inc. The court determined a business’s "economic and virtual contacts" with a state, or economic nexus, could be sufficient to trigger a sales tax collection obligation.

Since that seminal decision, 46 states, Puerto Rico, and the District of Columbia have adopted economic nexus provisions requiring certain remote sellers to collect and remit sales tax. Missouri became the last of the 10 tricky states to embrace economic nexus; its law took effect on January 1, 2023.

Now, the difficulties associated with sales tax compliance in these states start with determining whether a sales tax collection obligation exists. If it does, businesses will likely need to devote extra resources to filing and remitting sales tax.

You don’t get extra points for being sales tax compliant in tricky states. You do have to siphon resources away from other tasks and devote more time to getting sales tax compliance right, unless you outsource sales tax filing.