Do I need to charge sales tax in tax-free states?
Five states in this country do not have a statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon (the NOMAD states). That doesn’t mean businesses in these states never deal with sales tax.
Last June, the Supreme Court of the United States ruled in South Dakota v. Wayfair, Inc. that physical presence is no longer the sole requisite for sales tax collection. As a result, more than 37 states have established a sales tax collection obligation for out-of-state sellers with a certain amount of economic activity in the state, or economic nexus. For example, an out-of-state seller must collect California sales tax if it has more than $100,000 in sales or 200 transactions in the state in the current or previous calendar year.
Additionally, some localities in some NOMAD states levy local sales taxes. Businesses located in those areas may have to collect and remit sales tax now. Remote businesses that establish economic nexus with those jurisdictions may soon be required to collect their sales taxes. Some sellers are already doing so voluntarily.
What does all this mean for NOMAD-based businesses that sell into other states, or businesses that sell into areas of NOMAD states with local sales taxes? Read on and learn.
NOMAD businesses selling into sales tax states
NOMAD-based businesses may not be accustomed to dealing with sales tax because of the old physical presence rule. Thanks to Wayfair, they may need a crash course in sales tax.
To the best of my knowledge, officials in Delaware haven’t publicly responded to Wayfair or provided any guidance to Delaware businesses at risk of developing a sales tax collection obligation in other states.
On the other hand, the Montana Department of Revenue has a web page dedicated to sales tax and Wayfair. It advises Montana businesses to “seek competent legal advice on how to proceed with collecting and remitting sales tax” in states that may require them to do so, such as South Dakota and Washington.
The Oregon Department of Revenue provides similar advice: “If you are an Oregon online retailer with customers located in a state with sales tax, we recommend you contact the state directly or seek legal advice on how to proceed with collecting and remitting sales taxes.”
Stridently anti-sales tax New Hampshire takes an altogether difference approach. Governor Chris Sununu’s initial reaction to Wayfair was to warn anyone trying to impose a sales tax collection obligation on New Hampshire businesses to prepare for “the fight of your life.” The New Hampshire Division of Economic Development advises New Hampshire businesses to “alert their accountant, attorney, and other advisors” if they hear from an out-of-state taxing authority, as well as “notify the New Hampshire Department of Justice.”
Alaska is taking a different approach; the focus in the last frontier is on how the Wayfair ruling could benefit certain Alaskan municipalities.
Sales tax in NOMAD states
Although there’s no statewide sales tax in Alaska, numerous cities and some boroughs in the state levy a local sales and use tax. Thus, while there’s no sales tax in Chicken, Alaska (one of the best town names ever), the rate in Homer is a whopping 7.85 percent.
Businesses located in a jurisdiction with sales tax obviously must collect it. In addition, any business located outside the jurisdiction must register with the local tax authority and collect and remit sales tax if it has nexus with that jurisdiction.
To capitalize on the Wayfair decision, the Alaska Municipal League (AML) is working to establish a “responsible and responsive approach to [the] implementation of online sales tax collection and remittance in Alaska.” That includes establishing clear rules about what triggers nexus for remote sellers in each locality — or perhaps in the state. The AML wants the 105 taxing municipalities to “work together toward a single-level, statewide administration of online sales tax collection and administration.”
This will take time. However, localities may need to act quickly: Some remote companies, including Amazon, Netflix, and Overstock, have already started collecting local sales taxes in Alaska. The AML is concerned such sellers “risk faulty and potentially litigious implementation” of local sales tax collection by voluntarily collecting sales tax in jurisdictions that may not be ready for them to do so. “The system isn’t set up yet for this to go smoothly across the state.”
For now, the AML is encouraging patience with this “messy process,” both for Alaskans now paying sales tax on online purchases and the remote sellers collecting the tax. See the Alaska Municipal League website for the most up-to-date news.
Alaska seems to be leading the charge on this front for NOMAD states. It remains to be seen whether Montana localities with local resort taxes will follow their example; at present, the focus is on a proposed resort tax increase. In Delaware, where sales of goods are subject to gross receipts tax, the Delaware Division of Revenue notes: “The taxation of internet services is one of the hottest topics in the country. … Some states have enacted legislation and/or issued regulations concerning sales tax for businesses operating over the internet. Delaware is not one of those states.”
Track remote seller sales tax laws around the country on Avalara’s South Dakota v. Wayfair resource page.
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