By Tom James
In years past, sales taxes were a relatively simple matter for online businesses. A company only needed to collect and remit sales taxes when selling to residents of the state where the business was located. That changed, however, in 2018 when the Supreme Court handed down South Dakota v. Wayfair. Inc., a landmark case which abolished the “physical presence” requirement. Now a company may be required to collect and remit sales or use taxes if the company has an “economic nexus” with the state.
Unfortunately, it is not yet clear what exactly this means. Some believe it means a high volume of sales or a large amount of revenue from sales in a state; others say it has only to do with a merchant’s intention to sell to a resident of a different state. Congress has the constitutional authority to settle the question, but so far it has not done so. Until it does, it is up to individual business owners to figure out how to comply with the sales and use tax requirements of the states in which the business has customers.
There are no simple answers. An e-commerce business that sells to customers in other states will need to have a sales tax compliance plan that answers, with respect to each sale, the following questions:
Does the buyer’s state have a sales taxes?
Forty-five states and the District of Columbia require merchants to collect and remit taxes on sales to residents of the state; Alaska, Delaware, Montana, New Hampshire, and Oregon are the five states that do not tax sales. This statement is subject to some qualifications, however. Although Alaska does not have a state sales tax, about 40% of Alaskan cities impose taxes on sales to their residents. And although Delaware doesn’t have a sales tax, it does impose a gross receipts tax on sellers of goods (tangible or otherwise) and providers of services in the state.
Does the merchant have a physical or economic nexus to that state?
A business is not required to collect and remit sales taxes to a state unless it has either a physical or an economic connection (“nexus”) to the state.
“Physical nexus” means tangible property (e.g., storefront, warehouse, inventory) or person (e.g., officers, employees, salespeople) in the buyer’s state. If your company sells a product or service to a resident of a state in which the company has a physical presence, and if the state (or locality) taxes sales to its residents, then a merchant will need to collect and remit taxes on sales to those residents.
States vary in their definitions of physical nexus. Most include the kinds of things previously mentioned (physical storefront, employees, etc.), but some go further, declaring that the presence of an affiliate marketing program participant in the state suffices to establish a merchant’s physical presence in the state. Still others have experimented with things like “click-through nexus” (existence of a link to the merchant’s website on an in-state website) and “cookie nexus” (placement of software coding on an in-state computer or device). Still others impose reporting and use-tax notification obligations on out-of-state sellers even if they do not collect and remit taxes on their sales to residents of the state.
Now that physical presence is no longer necessary to establish a nexus, states are adopting “economic nexus” thresholds for the imposition of tax collection obligations on out-of-state merchants. These laws specify an annual sales volume and/or revenue threshold at which a merchant’s tax collection and remittance obligation kicks in. Companies that make a specified number of sales or derive a specified amount of revenue from residents of the state must collect and remit taxes on all sales to residents of the taxing state. Companies with a smaller number of sales and a lower amount of revenue from sales to residents of the state are not required to collect and remit the tax.
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Are the products or services taxable in that state?
The kinds of products and services that are subject to sales tax vary widely from state to state. For example, some states tax digital products like software programs and digital downloads; others do not. Most states exempt a variety of products and services (e.g., certain items of clothing or food, legal services, etc.) Exemptions vary widely from state to state, too.
There are also variations between state and local exemptions. In Tennessee, for example, food is subject to local sales taxes but not to state sales tax.
If so, at what rate?
State sales tax rates range from $0 in states that have no sales tax to 7.25% in California. Combined state and local sales taxes are as high as 10.02% in some parts of Louisiana and 9.46 in some Tennessee localities. Adding to the complexity is the fact that even within the same taxing jurisdiction, some products and services are taxed at higher rates than others.
How does a merchant collect and remit the tax?
It is unlawful to collect sales tax without a required license or permit. Therefore, a business will need to register for a sales tax permit in each state in which it expects to owe sales or use taxes. The taxing state should make information about how to file and the frequency with which tax payments must be remitted (quarterly, annually, etc.) available.
For direct sales from a company’s website, the site will need to be set up in such a way that the correct amount of sales or use tax will be collected from a buyer based on the buyer’s place of residence. Care should be taken thereafter to remit these payments to the appropriate taxing authorities.
Sales through marketplace platforms
If the company uses a third-party platform, such as Amazon, Shopify, or Etsy, to sell its products or services, then it should check these platforms to make sure that appropriate sales tax collection is enabled. If it isn’t, then the merchant will need to communicate with the platform provider regarding how to set up the site so that appropriate sales taxes are collected.
Some states have enacted laws to require marketplace platform providers like Amazon to collect and remit sales and use taxes on behalf of the vendors who use their platforms. Some states, such as Iowa, do not require a merchant to register for a sales tax permit or file returns if all of its sales in the state are made through marketplaces that collect and remit the taxes on its behalf. Other states require the merchant to register for a sales tax permit, even under these circumstances. In all events, a merchant that uses other channels in addition to (or instead of) a marketplace platform provider will need to assume direct responsibility for compliance with all state sales and use tax laws.
A state’s volume or revenue thresholds apply to a company’s total sales and revenues from all platforms and channels. For example, if a state has a 200-sale threshold, and a company conducts 180 sales through a third-party platform like Amazon and 21 sales through its own website to residents of that state, then the threshold is met and the company must collect and remit taxes on all 201 sales.
Summary of state sales nexus laws
IMPORTANT NOTE: The following information is, to the best of my knowledge, valid as of April 2019. But laws in this area are constantly in flux, and many bills are now pending that could change the information provided here. It is also possible that Congress may intervene in this area soon. The reader should check with a state’s department of revenue or other appropriate agency for current information.
Annual sales volume thresholds:
- Alabama ($250,000 sales and certain solicitations)
- California ($100,000 or 200 sales)
- Colorado ($100,000 or 200 sales)
- Connecticut ($250,000 and 200 200 sales and systematic solicitation)
- District of Columbia ($100,000 or 200 sales)
- Georgia ($250,000 or 200 sales)
- Hawaii ($100,00 or 200 sales)
- Idaho ($100,000); Illinois ($100,000 or 200 sales)
- Indiana ($100,000 or 200 sales)
- Iowa ($100,000 or 200 sales)
- Kentucky ($100,000 or 200 sales)
- Louisiana ($100,000 or 200 sales)
- Maine ($100,000 or 200 sales)
- Maryland ($100,000 or 200 sales)
- Michigan ($100,000 or 200 sales)
- Minnesota (100 sales or at least 10 sales totaling over $100,000)
- Mississippi ($250,000 and systematic exploitation of Mississippi market)
- Nebraska ($100,000 or 200 sales)
- Nevada ($100,000 or 200 sales)
- New Jersey ($100,000 or 200 sales)
- New Mexico ($100,000)
- New York ($300,000 and 100 sales)
- North Carolina ($100,000 or 200 sales)
- North Dakota ($100,000)
- Pennsylvania ($100,000)
- Rhode Island ($100,000 or 200 sales)
- South Carolina ($100,000)
- South Dakota ($100,000 or 200 sales)
- Tennessee ($500,000 and systematic solicitation)
- Texas ($500,000)
- Utah ($100,000 or 200 sales)
- Vermont ($100,000 or 200 sales, plus systematic solicitation)
- Virginia ($100,000 or 200 sales)
- Washington ($100,000)
- West Virginia ($100,000 or 200 sales)
- Wisconsin ($100,000 or 200 sales)
- Wyoming ($100,000 or 200 sales)
Physical presence (storefront, etc.) nexus:
- All states.
Affiliate/click-through nexus:
- Arkansas
- California
- Colorado
- Georgia
- Idaho
- Illinois
- Iowa
- Kansas
- Louisiana
- Maine
- Michigan
- Minnesota
- Missouri
- Nevada
- New Jersey
- New York
- North Carolina
- Ohio
- Oklahoma
- Pennsylvania
- Rhode Island
- Tennessee
- Texas
- Utah
- Vermont
- Virginia
- West Virginia
Cookie nexus:
- Iowa
- Massachusetts
- Ohio
- Rhode Island
- Tennessee
Marketplace tax collection obligations:
- Alabama
- Arizona
- Connecticut
- District of Columbia
- Hawaii
- Idaho
- Iowa
- Kentucky
- Minnesota
- Nebraska
- New Jersey
- New Mexico
- New York
- North Dakota
- Oklahoma
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Virginia
- Washington
- West Virginia
- Wyoming
Use tax reporting obligations for non-collecting sellers:
- Alabama
- Colorado
- Connecticut
- Georgia
- Hawaii
- Louisiana
- Oklahoma
- Pennsylvania
- Rhode Island
- South Dakota
- Vermont
RELATED: Are These Tax Deduction Mistakes Costing Your Small Business Money?
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