When and where does my business have to collect sales tax?
The second part in our Sales Tax Forum series tackles nexus – the ties between a business and jurisdiction that trigger a tax obligation – and internet sales tax. Read real questions from businesses and real answers from Avalara’s Shane Ratigan J.D. LLM (Tax).
The Sales Tax Forum series is created from overflow questions from one of Avalara’s Thought Leadership Webinars, Listen to the original webinar here.
Take it away, Shane . . .
NOTE: The answers provided here do not constitute legal advice. The answers are not intended to convey legal advice. My goal is to provide knowledge and insight into sales tax compliance and sales tax law especially with general replies to your submitted questions. Please consult with your tax professional to determine the very best approach for your company.
People think internet sales tax rules have changed, just because Amazon.com now has warehouses in a lot of new states, creating physical nexus. Nothing has really changed, correct?
There is currently no national law concerning sales taxes on remote sales. The Marketplace Fairness Act did not pass the U.S. Congress in 2013.
That said, the states are working to include as many sales as possible in their sales tax revenue stream. “Click-through” nexus is a reality in more and more states, while other less news-worthy activities (like company affiliations or the use of third party entities to perform traditionally in-house tasks) are more likely than ever to be viewed as nexus-triggering activities.
Can you give a general discussion of internet sales and nexus relating to them?
The term “internet sale” is somewhat of a red herring in the context of the current discussion around the proposed Marketplace Fairness Act. The proposed law actually applies to any business making “remote sales,” whether those sales are completed using the internet as a medium or not. For purposes of the proposed act, a “remote sale” is a sale made across state lines where no tax is collected due to lack of nexus (obligation to collect).
It probably goes without saying that e-commerce retailers are making a lot of the “remote sales” that the proposed law is intended to capture. The law is especially intended to apply to e-commerce retailers that make a lot of sales across the nation but are not currently collecting sales taxes in many states. New rules in this area will have a huge effect on e-commerce providers (aka “internet sellers”).
Nexus creates the obligation to collect sales tax on behalf of a state and depends on the connections your company has with a given state. Once those connections reach the state’s designated threshold, nexus is triggered and a state may require the collection of sales taxes on its behalf. Nexus relates to principles written in the Constitution of the U.S.A, particularly the due process and commerce clauses.
For e-commerce providers, nexus is the legal test that determines where and when you collect sales taxes.
What is the biggest change in internet and/or state-to-state tax on inventoried items sold to locations in other states?
Inventoried items sold to other locations of your company should not typically be subject to sales tax unless a retail sale is taking place.
Our company is registered in Illinois but does business on location in many West Coast states, especially Arizona, by selling packaged foods at events and fairs, including street vending of Kettle Corn.
As to whether you should be charging sales taxes on the sales you make, we discussed in the webinar that whether attendance at trade shows, fairs or other transitory events creates nexus varies a lot from state to state and scenario to scenario. Some determinativefactors might include:
- The duration of the show
- Whether your company has other borderline nexus triggering activities
- How many shows you attend over a given period
- Whether the given state provides for temporary sales tax registrations
This is a good question that raises another important concept from the webinar.
First, a company must determine whether its activities in or connections with a state are sufficient so that the state can assert an obligation to collect sales tax. This is the nexus question: do you have it or don’t you? In this scenario, is attendance at consumer trade shows or county fairs sufficient to trigger nexus?
If the answer to the first question is “yes” or “it’s a close call,” or “we’re not sure, but we’d like to know more about what we sell,” a company must determine whether the objects it sells, (products, services, leases, licenses, lunches, etc.) are subject to sales tax when they are sold in the manner in which they are being sold.
These are big, ‘30,000 feet’ questions here, and we know each of them can split off into many more, but remember—the question of whether or not you need to collect is usually an isolated question from whether or not what you sell is taxable.
If a business is located in South Carolina and the business ships to a customer in Vermont, do we charge tax to the customer since the product was received out of our state?
I don’t know enough about the nature of the objects you are selling to be precise, but the question brings up an important point. We discussed “sourcing” in the webinar. This is one of the terms our tax professionals use to describe how we determine what rules to apply for a given transaction.
Allow me to put it another way: what is the “source” of the rules that will dictate taxability of a transaction?
In the sales tax realm, each and every transaction is intended to be taxed only once. The tax is almost always applied (some states use a hybrid formula for intra-state sales) using the rules in place at the seller’s location (“origin sourcing”) or the rules in place at the customer’s location (“destination sourcing”). As a general rule, all inter-state retail sales are sourced based on the destination model. The customer’s location defines the tax rules applied to the transaction.
In a destination model like we have in the U.S., sellers making sales across state lines must usually collect tax, and adhere to the rules about nexus, based on their customers’ address.
What constitutes nexus? Is it different between states?
From a fundamental point of view, there is no difference between the states. Each state must play by the rules set forth under a handful of U.S. Supreme Court decisions to determine the boundaries of nexus. From a practical point of view, at times there is some variance between the states, especially when a nexus triggering event falls outside of the decisions of the mainstream cases.
Here is a taste of the types of activities or connections you should be discussing with your tax advisors when studying your nexus exposure.
Note: Keep in mind that each company’s mix of these activities and connections will vary, and all of these things should be considered in isolation if there are questions about conceding nexus:
DISTRIBUTION AND DELIVERY
- How many annual deliveries does your Company make with your own vehicle?
- Does your Company employ third party delivery services to deliver your goods exclusively?
- Does your Company have resident employees of another jurisdiction?
- Do employees perform the following activities in another jurisdiction?
- Approve or Accept Orders
- Accept Deposits
- Conduct Training or Seminars
- Perform Customer Service
- Attend Meetings
- Attend Trade Shows
- Check Credit Worthiness of Customers
- Check Customers’ Inventories
- Collect Delinquent Accounts
- Hire, Train or Supervise
- Maintain Samples
- Negotiate Prices
- Operate Mobile Stores
- Perform Repairs, Maintenance, Installation
- Pick Up/Replace Defective Merchandise
- Provide Design Services
- Work from Home
- Repossess Property
- Set up Displays
FINANCIAL OR BANKING ACTIVITY
- Does your Company have bank accounts in another jurisdiction?
- Loans or other relationships in another jurisdiction?
THIRD PARTY ACTIVITIES
- Do any Third Parties provide any of the following services on your behalf?
- Credit Checks
- Fulfillment Services
- Inventory Management
- Does your business utilize a “doing business as” or similar name registration in another jurisdiction?
- Registered vendor for other tax purposes in another jurisdiction?
- Prior sales and use tax registration?
- Does your business have licensees in another jurisdiction?
- How often does your Company display your business at trade shows in other jurisdictions?
- Does your Company advertise on local media in another jurisdiction?
- Does your Company advertise on national media?
- Does your Company pay Commissions to your advertisers (including Affiliate advertising)?
- Does your Company have a local phone number in another jurisdiction?
- Does your Company have a national toll free number?
- What is the location of the server that houses your website?
- Does your Company purchase or rent customer lists?
- Does your Company send catalogs?
- Does your company own, lease, use or maintain any of the following in another jurisdiction?
- Display Racks
- Display or Sample Room
- Stock of Goods
- Mobile Store
- Meeting Place for Directors, Officers, or Employees
- Parts Department
- Repair Shop
- Real Property or Fixtures
- Telephone Answering Service
- Computer Servers