Navigating New Market Terrain While almost every entrepreneur dreams of scaling beyond their state borders, understanding the hurdles of expansion can be tricky. Here are a few pointers.
By Kari Warberg Block •
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As an entrepreneur of a fast-growing company, I am naturally in a hurry to expand. But as my business has scaled up, and I have expanded distribution across multiple borders at a rapid pace, I have encountered new market issues I hadn't fully considered in my planning. And it isn't going to get easier.
With new regulations being considered and implemented from state to state in 2014, as well as many state governments considering new ways to generate revenue, mapping the regulatory terrain across these borders continues to get trickier.
For instance, the level of knowledge required for national distribution of our products has required us to switch tax firms and double the budget for new regulatory compliance to help us meet the growing level of complexity in the ever-changing regulatory environment.
Related: 10 Questions to Ask Before Expanding Overseas
With what I have learned the hard way, here are three tips that will hopefully help you prevent unforeseen problems when expanding your business across state borders.
Research tax nexus. When you hire employees, add contract staff or property in another state, you are introduced to new obligations regarding sales, income and other taxes -- enter tax nexus. Nexus, which is sometimes called sufficient physical presence, is a measure that state tax departments use to determine if a business from outside a state selling products into their state is liable for the state's sales tax. Nexus can apply when your company maintains any presence of property, products, or people in another state, whether permanent or temporary. Even if you utilize an independent sales representative who signs a binding contract, you as an employer may be liable to Nexus burden in some states.
Related: Tips for Expanding Your Business to Another City
Understand state regulations and fees. It is a moving target! State regulations and fees can differ dramatically, which requires you to begin homework anew with each new area your business enters. For instance, if you sell a product that claims to mitigate, control, kill or repel an organism (as we do) the manufacturer is required to pay state-license fees, even if the product is safe, natural and organic. In addition, states such as Minnesota and North Carolina have recently issued additional fees that are assessed based on the percentage of sales or shipments within their state's borders for such things as ACCRA -- Agriculture Chemical Response and Reimbursement Act -- and ETFA, also known as Environmental Trust Fund Assessment in North Carolina.
These fees can cost as much as eight percent of a company's total sales volume in these states, in addition to the state license fee and regulatory consultant costs. American manufacturers are grudgingly assessing how to pass along these extra fees equitably since it is not technically a tax, but rather a new regulatory cost calculated like a tax that must be passed on to the consumer. And money-starved states are rushing to enact similar regulatory fees prior to administration changes that may force the hand of officials to provide a public notice of such prior to making them law.
Learning the lowdown of HR law. In addition to the tax implications, there are requirements for worker's compensation and unemployment fees when adding employees in new states. Employment rules also vary from state to state, so be sure to understand how this may impact your employment policies for things like vacation, sick leave and paid holidays.
For instance, if you have employees, like sales representatives, that work nights, weekends or holidays, you are responsible for paying these benefits many years after their employment has ended if they seek restitution. The burden of proof falls on the employer if the employee feels they have funds due and has appropriate documentation. If your employees answer texts, tweets or use Facebook after hours, their time working must be documented and paid.
How did I overcome these issues? I found it essential to find advisors that are knowledgeable in these specific topics that can help determine the impact in terms of expenses, taxes, risk and business operations.
None of these considerations are insurmountable when you plan accordingly, but the cost of not being compliant definitely could be.
Related: The Hurdles of Scaling Globally
