Sales tax is the biggest issue for ecommerce in 2018. Are you ready? In this blog, we’ll talk about the old rules for nexus (connection) that creates a situation for sales tax.
The first questions are likely “where” do I need to collect and pay and “when” do I need to start?
Let’s start with “where” because the “when” then follows what that state says. Some states say that you have to collect and pay only after you’ve had a certain amount of sales in that state.
The one thing you can’t do is ignore this. And, don’t assume that you’re selling something that is exempt from sales tax. For example, digital sales are subject to sales tax in some states. In other states, they are not. In most states, food items are not subject to sales tax, but then the definition of what is considered food and what is ready-to-eat can vary wildly. In a now infamous example, the State of Washington issued a statement of 694 exemptions from sales tax in a complicated “this counts”, “this doesn’t” that defies logic. The best thing is to just hope you don’t have to collect and pay sales tax in one of the states where it is very difficult to calculate.
Nexus is broadly defined as “a physical connection to a state or local taxing jurisdiction”. However, nexus is not limited to a physical presence in the plain English sense of the words. Originally, a Supreme Court case determined what that meant. It is called the “Quill Case” and if you decide to study sales tax nexus on your own, you will run into it.
Let’s look at the most common, and proven, methods of creating nexus. Once you have sales tax nexus, you are responsible for knowing and applying the sales tax rules for that state. Like we said above, don’t assume you know what’s applicable based on the rules for your home state.
You are responsible for collecting and paying sales tax for the state in which your business is located. If your business is set up in a state different from where you live and you do work for your business, then you probably are going to have sales tax (and possibly income tax as well) for both states.
You can also trigger sales tax nexus by having your business entity set up in another state other than where your business is located.
If you visit a state for business like a trade show, sales call, meetings, etc., you may have just triggered sales tax nexus for the year for sales made to customers in that state.
If you’re using a service like FBA (Fulfilled by Amazon) or other 3rd party fulfillment, you will likely have nexus in the states in which your product is warehoused.
If you have employees who work in other states, that usually means you have triggered a nexus for that state.
An affiliate is someone who sells your products or services for a referral fee or commission. Some states have been successful with establishing nexus for companies that have affiliates in their state. This is known as the “Amazon tax” or “Click through nexus”.
Not all states establish nexus, but enough do that you need to know the law for the states in which you have nexus.
In 2016, South Dakota passed a law that said any out-of-state seller who had 200 or more transactions or $100,000 in gross sales would establish nexus.
A fight ensued. The Supreme Court weighed and said that South Dakota’s law was reasonable. That opened up the field for other states to pass similar laws. Note that the only physical presence is simply based on economic nexus within the state. You don’t have to live there or have a business there. You don’t have to have employees or affiliates within the state. You just need to sell enough in the state.
So where are we now, as we move into 2019?
Out of the 50 states, 5 do not have sales tax, so they don’t count. Of the remaining 45 states, 29 have passed a law similar to South Dakota’s law.
California follows South Dakota’s limits. PA has a $10,000 sales threshold and Texas has a $500,000 threshold.
We are expecting FL, KS, MO, NY, TN, WA and MD to pass similar laws soon.
CO is reworking their sales tax rules because businesses have complained that their sales tax system is too complicated with 683 combinations possible of local taxing jurisdictions. AL is going through similar problems.
NH is taking the law in another direction. They don’t collect sales tax and they think their sellers shouldn’t have to pay in other states either. That will be an interesting one to watch.
Those are just some of the highlights from sales tax. This is likely something you need to discuss with your tax professional soon!