When do I collect sales tax on out-of-state sales?
At one time, a business was limited to selling to customers who lived nearby. The Internet has changed all of that, allowing even the smallest local boutiques to sell to customers located around the globe. Whether you’re operating an online business, a local storefront, or a combination of both, you likely face the issue of selling to out-of-state customers.
Although this can dramatically increase your business’s income, it also complicates sales tax collection. Your business may be fully aware of the local and state sales taxes that affect your product sales, but the matter is complicated when selling to customers in different areas of the country, where tax rates differ. Here are a few things you should know before selling your products to out-of-state customers.
Nexus determines whether or not a business owes sales tax on the products they sell to out-of-state customers. A business located in Pennsylvania that sells a product through an online store to a customer in Texas wouldn’t be required to pay sales tax unless that business has nexus in Texas. Nexus means that a business has “a physical presence,” which in Texas is defined as having a physical location or employees in the state. A business with a representative conducting marketing activities in Texas would also qualify as having nexus in that state.
The most complicated part of nexus is that each state has its own laws. Having an office or storefront in a state will always establish nexus, but some states have chosen to focus more on the financial aspects of doing business in a state. Known as economic nexus, these newer requirements have businesses that sell through affiliates paying tax on those sales. New York is one state that has begun this practice, with other states following suit.
Nexus by Offering
In addition to physical presence, nexus also depends on what a business is selling. In most states, services aren’t taxable, so businesses offering services across state lines should research and eliminate this if they can. The gray area between products and services is becoming more defined, however, as legislators increasingly pass laws that tax services like cloud-based software and downloadable media like music and movies.
One service that may trigger sales tax for a business is warehouse storage. Fulfillment by Amazon (FBA) has accelerated discussions on this issue, since Amazon speeds up customer deliveries by storing products in warehouses across the country. In doing so, businesses that sell in locations like Minnesota and Kentucky may find that they already have nexus in those states, since the products they sell through Amazon are stored in warehouses located there.
Businesses that sell to customers across state lines only pay sales tax if the business qualifies as having nexus in that state. The best way to determine nexus is to study laws as they apply to every state. In general, when a business has a physical location, warehouse, or representative acting on its behalf in a state, that business will have nexus. But with inventory storage now counting as nexus in some areas, businesses will need to carefully study local laws before making any sales in a new place.
The 2021 sales tax changes report: midyear update
Your guide to navigating the complicated world of tax compliance and preparing for the future
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