Out-of-state sales can grow your small business — and your tax burden, too
Small businesses don’t have to stay small — especially today, when it’s easier than ever to broaden your customer base by selling online. Just build a simple website, or create a presence on an ecommerce platform, and all of a sudden your business has gone nationwide.
Keep in mind, though, that your profits aren’t the only thing likely to grow as you start reaching buyers in different states. The complexity of your business is going to increase, too.
You might face concerns you’ve never had before: How smooth is the buying experience? What providers should you choose for your systems, such as payment processing? What’s the most efficient way to process and ship orders? What about handling returns from remote buyers?
You might also want to start thinking about whether you need to charge sales tax in all of these different states. New to sales tax compliance? Get started with our publication, Sales Tax Essentials for Small Business.
The answer to that question comes down to whether you have nexus, of course — something you’ve heard us talk about a lot. It’s easy to figure out when you’re selling in states where you have a physical presence or perhaps another substantial connection (employees, inventory storage, etc.). That’s traditional nexus, and you’ll definitely need to collect sales tax on taxable products and services in those states.
The rules have changed in many states, though, thanks to something called economic nexus.
How economic nexus works
In an effort to increase revenues (or, as some states would contend, simply collect the taxes they’re owed but have missed out on over the years), several states now have laws that determine nexus based on a company’s revenue in the state, transactions in the state, or both.
That means once your company hits a certain threshold — for example, 200 transactions or $250,000 in sales — you now have nexus in that state and must register, collect, and remit sales tax there. (In some states, you have to reach both a certain number of transactions and a defined amount of revenue before you have nexus.)
Those numbers might seem out of reach for your company, but keep in mind that economic nexus laws differ by state: $250,000 is a lot of sales, but in Pennsylvania, for example, the threshold is just $10,000. And if you sell a lot of small items, or have a large target market in one particular state, 200 transactions might not be as hard to hit as you think.
Additionally, states treat the period for meeting the threshold differently — in some, it’s whether you reach their number(s) during the previous or current calendar year. In others, it’s a rolling 12-month period, which could span over two calendar years.
To learn more about the economic nexus laws in states where you sell, visit our easy-to-use tool here. It features state-by-state breakdowns and links for more information.
What sales count toward the threshold?
This is another state-specific question: For example, some laws reference only tangible property, while at least one includes sales of digital items. Others may include services. In general, if a product or service (including shipping) is taxable in a particular state or jurisdiction, it probably is a transaction or amount that will count.
What happens after you hit the threshold?
If you met a state’s threshold during the previous calendar year, you’ll need to register and collect sales tax going forward. But other situations aren’t so clear: What if you hit the threshold in the middle of a year? Do you register and start collecting taxes for only the transactions that come after the threshold — for example, your 201st transaction? Or are you then responsible for sales tax for the other 200 transactions, too?
While it would seem unfair to require retroactive sales tax collection, some states don’t address that explicitly. It’s best to either ask the specific state directly or work with a tax professional.
What else do you need to worry about?
Once you have economic nexus in a state, you can’t just start charging sales tax on taxable items you sell there: You first have to register for a permit, either online or through a paper form, and you can only begin collecting sales tax after you have the permit.
Then, you’ll also need to remit the taxes you collect to the state and file sales tax returns, depending on the schedule of each particular state. (See our previous post on registering, collecting, and filing.)
So not only do you have to worry about whether you’re subject to economic nexus laws from state to state (and keeping up with ever-changing laws), you might also have to learn how to handle sales tax in any number of those states and jurisdictions. It’s a lot to figure out for any small business owner.
The small business solution
Growing a business is hard enough; don’t add sales tax hassles to your list of worries. At Avalara, our goal is to ease the burden on business owners like you.
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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