A simple equation for businesses that sell online: sales tax is roughly a third of the average state’s tax revenue + ecommerce is one of the fastest growing sectors of the economy = states are passing more laws to try and capture revenue from online sales. While the equation might seem simple, tracking and complying with these sales tax laws can be confusing and time consuming. Sales Tax and the Internet Merchant, an ebook detailing new tax requirements for online sellers, puts it this way:
As federal and state governments turn their attention to capturing more revenue from Internet sales tax, many ecommerce businesses are finding themselves under increasing scrutiny, and they need to look at the impact sales tax may have on their business as they expand into more states.
As a result of this ‘new normal,’ one of the most common questions asked by online sellers is if and when they have to collect sales tax on their transactions. The short answer is, unless you’re dealing with exempt products or customers, you have to collect tax everywhere you have nexus. Nexus is the connection between a jurisdiction and a business that triggers the obligation to collect tax. As you may have guessed, “connection” is the operative word, and one of the ways states are capturing more online tax revenue is by stretching their definitions of connection.
Here are 5 connections, or activities, listed in Sales Tax and the Internet Merchant that can give online sellers the obligation to collect sales tax.
1. Drop shipping
In some states, use of an in-state third-party shipper by an out of state retailer can trigger a sales tax obligation. In California, New York, Texas, and Florida for example, if a drop shipper delivers goods on your behalf, you could be obligated to collect tax.
2. In-state affiliates
An increasing number of states are passing Amazon Tax laws designed to require Amazon and other remote sellers to collect sales tax. In 2014 alone, Amazon started collecting sales tax in Illinois, Indiana, Florida, North Carolina, Tennessee and Nevada. Don’t be fooled by the name, however, Amazon Tax laws impact more businesses than just Amazon.
Consider California’s Amazon Tax law, enacted in 2012: if a business sells more than $1 million to California consumers in the past year and has more than $10,000 in sales referred by an affiliate operating in California, they have to collect sales tax on California sales. Referrals here include online referrals.
Even if your business doesn’t do $1 million in sales in a single state, you may have to collect sales tax in a state where you have inventory. Sellers that use Amazon’s fulfillment program, for instance, may have a sales tax obligation in any of the thirteen states where Amazon has a fulfillment center. For example, Pennsylvania directly asserts that using fulfillment services creates nexus for remote sellers
4. Trade show attendance
Did you send any employees to any trade shows, like IRCE, last year? If the answer is yes, you may have created the obligation to collect tax in the state where you attended the show. In Illinois, home of IRCE, any out of state retailer occasionally attending a trade show in the state with “. . . any kind of order-soliciting or order-taking representative . . . must collect and remit the Use Tax….” Not all states consider trade show attendance to be a sales tax trigger, but enough do that it’s well worth tracking the tax laws in states where you attend shows.
5. Remote employees
Even if your sales people don’t attend trade shows, they may give you a sales tax obligation if they travel to other states to visit customers or prospects. Variables include how frequently a salesperson travels to a given state and the type of activities they engage in while there.
Of course, there are other activities and connections that can give online sellers the obligation to collect sales tax on remote sales. It’s key to keep up on local and state laws anywhere you make sales so you don’t find yourself out of compliance.
Ready to learn more? Read this free article on the Hidden Costs of Tax Compliance.