A recent consultation client told me he lived in the State of Virginia but wanted to form a Single Member S Corp in Delaware. The purpose of this LLC formation is to start an Amazon online business.
Question: If he formed a single member LLC S Corp in Delaware would he have to pay sales tax in Delaware and Virginia?
The question has to do with nexus. Nexus means connection. If you have sales tax nexus in a state, you are responsible for collecting and paying sales tax according to the laws of that state. If you have income tax nexus, you have to file an income tax return in that state. There is also “other” nexus which means you are responsible for paying gross receipts taxes, franchise tax or some other morph of income tax.
So the question is: Does forming a company in a state create nexus? For that, we need to look specifically at Delaware law. Does DE consider a DE entity enough to create DE nexus for sales tax, income tax or other form of tax? Or, more specifically, does a DE entity mean you’ll have to collect and pay sales tax for DE sales?
The answer is an easy one. No. That’s because Delaware doesn’t have sales tax.
But the question is worth exploring a little further. Would you have income tax nexus, responsible for filing an Delaware income tax return?
If all you’ve done is form an entity in DE, then you are responsible for the annual filing fees to the state. If you actually do business in DE, based on their definition of what that means, then you will need to apportion income to the state.
Don’t assume all states are like this, though. For example, Texas has no income tax, but they have a Franchise Tax that can really sneak up on business owners and real estate investors who used the good Texas Series LLC law to form an entity that operates in other states. Everything’s fine until they realize they now have franchise tax. And, while we’re picking on Texas, they have a broad definition of what constitutes nexus for sales tax. If you qualify for that, you can even be forced to pay sales tax on digital downloads you make to residents of the state.
Sales tax nexus has been complicated in the past. The US Supreme Court recently made it even more complicated in the Wayfair decision. It’s now up to individual states, following this precedent, to make much broader definition of sales tax nexus. It could be simply by making sales to people in the state with an online business. Not many states have jumped on this new revenue raising bandwagon, though. At least not yet.
Keep watch for this particular area of tax law. It’s about to get a whole lot more complicated.