5 Growth Strategies
that Create Tax Risk
Growth is the hallmark of success for any
business. Yet, the very activities that lead a
thriving business to gain a foothold in the
marketplace may create surprising tax
compliance risks. Before you take expansion
too far, understand how it affects your tax
obligations and what you can do to keep
risk in check.
5 Growth Strategies that Create Tax Risk ©Avalara 2014. Page 1
Here are five ways your success can be your downfall
when it comes to tax compliance.
1. Expanding your operations.
Adding new locations or products to your business can help increase sales volume. It can
also increase your tax obligations. Expanding your physical footprint can trigger “nexus,”
which is a connection between you (the seller) and the state or municipality in which you
now have a presence. Each new state in which you do business represents an additional
set of rules and regulations. Given the number of jurisdictions in the U.S. (12,000+), even
well-intentioned companies are hard pressed to get sales tax right.
2. Hiring contractors.
Independent contractors can be helpful in increasing operational capacity without
committing to ongoing fixed costs or for seasonal staffing needs for construction firms or
retailers. However, contract employees can also add to your compliance burden. Hiring,
documenting, and managing 1099s and other requirements is highly prone to error,
especially when handled manually. Without a bulk validation tool, you are exposed to
increased audit risk from incomplete or missing 1099s.
3. Introducing new products and services.
Innovation can position a company to grab more market share, increase shareholder value
and meet customer demand. But as the number of new products and services proliferates,
so does transactional tax risk. What one state deems as taxable another might view as
tax-exempt. Product taxability rules in the U.S. change an estimated nine million times
annually. Multiply the number of products by the number of jurisdictions by the number of
exemptions by the number of rules and you’ll start to get the picture of how easy it could
be to unwittingly over- or under-charge sales tax.
4. Expanding routes to market.
As relationships with distributors, manufacturers, and others along the supply chain pro-
liferate, the levels of exposure to tax risk grow as well. Selling online? More than 20 states
now have some kind of Internet sales tax, giving states more control over out-of-state seller
activity. Fulfillment by Amazon (FBA) or similar partnerships are a great way to shorten
the distance between the product and the end-user, lower overhead and storage costs and
scale operations. However, fulfillment centers and drop shippers can be significant enough
physical presence to create nexus in certain states and trigger a tax obligation.
5 Growth Strategies that Create Tax RiskPage 2
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view online demonstrations,
or chat about AvaTax’s
A privately held company, Avalara was founded by a team of tax and software industry veterans to fulfill a vision of delivering an affordable, scalable sales tax
solution. Thus making what was not economically feasible in the past for mid-sized business not only affordable, but more accurate as well — all with the latest and
most innovative technology available. From Bainbridge Island, close to Seattle, Avalara’s knowledgeable staff works tirelessly to help customers put the hassles of
sales tax compliance out of mind. Avalara’s mission is to transform the tax process for customers by creating cost-effective state-of-the-art solutions. The company
does so through integrated on-demand, Web-based software services that provide transparent transactions, accurate tax compliance, painless administration
and effortless reporting.
5. Growth itself–more money, more problems.
As a retailer, outsourcing logistics frees up time to focus on selling and merchan-
dising. Having fulfillment, warehousing, and delivery activities handled by
third-party providers not only lowers overall spend, it helps improve customer
service. These providers are experts in what they do. So they can respond quickly
and scale to meet demand easier than you can.
Don’t let business gains become compliance pains.
» Understand how growth plans could great new tax obligations.
» Keep up with changes in rates and product taxability
» Automate indirect tax tasks in your accounting system