Online Sellers In States With No Sales Tax Don't Get Off Tax-Free
- Sales Tax
- May 9, 2016 | Laura McCamy
If your business is based Oregon, Montana, New Hampshire, or Delaware, you may have tuned out the whole conversation about nexus and sales taxes on online sales. These four states have no state sales taxes, so you don’t have to worry about collecting and remitting sales taxes in your home state. (Alaska doesn’t have a state sales tax either but, it does permit local sales taxes. More on Alaska below.) If your business involves shipping orders to customers in other states, it’s time for you to learn about nexus, even if you live in one of the states with no sales tax.
What Is Nexus?
Nexus is the technical term for when a business has a physical presence in a state that triggers the obligation to collect and pay sales taxes in that state. If you sell mittens in Montana, you have nexus in Montana. Since the state has no sales tax, you don’t need to add tax when you sell to Montana residents. You can also ignore sales tax when you sell to customers in your knitwear shop, no matter where they live.
When you open an online store, however, things get trickier. Now you are starting to ship orders to customers in other states. Shipping out of state orders isn't enough on its own to give you nexus in another state. At first, you can probably continue to ignore the whole sales tax thing. That may soon change, though, because there are several ways you could end up with nexus in a state that does levy a sales tax.
Amazon FBA Nexus
Let’s say you decide to join Amazon’s online marketplace and your mittens become popular. You can’t run your shop in Missoula and ship all your online orders in a timely manner. You could hire an extra employee just to handle your Amazon orders, but that’s expensive. So you use Amazon FBA to lighten your workload and keep your customers happy.
If Amazon FBA warehouses your product in Oregon or New Hampshire, you still have nexus only in states with no sales tax. If Amazon moves some of your product to a New York fulfillment center, however, your products in that warehouse give you nexus in New York State. You will need to register to collect NY sales tax on the sales you ship to New York -- whether they are sold through Amazon or your own website’s shopping cart. Welcome to the world of sales taxes.
The owner of the website More About Mittens approaches you with an offer you can’t refuse: She will promote your Montana mittens on her blog and allow her readers to click through to your online store. In return, you give her a small commission every time a click from her site leads to a sale on yours. This blogger is based in Maine, a state that does have sales tax.
At first, you get a trickle of sales. Still no nexus issue. Then More About Mittens puts mittens on kittens and the blog goes viral. Your click-through sales shoot through the roof. In fact, you log more than $10,000 of mitten sales through your partnership with this Maine-based blogger. Sales of $10,000 or more through affiliates located in Maine triggers click-through nexus -- in other words, you now have nexus in Maine. You now need to register and collect ME sales tax when you ship orders to Maine. Numerous states have click-through nexus laws, so it’s a good idea to check on that when you start working with affiliates.
The Alaska Exception
Alaska always has to be different. Unlike in the other four states with no sales tax, Alaska cities and districts can impose local sales taxes. You can sell anchors in Anchorage tax-free but the gnomes you sell in Nome will be subject to that city’s 5 percent sales tax. AK sales taxes only apply to you if you have nexus within an area that has a local sales tax. Amazon has no FBA in Alaska, so the biggest concern for Alaskan ecommerce sellers is likely to be nexus in other states.
Best Practices for Ecommerce Sellers in States with No Sales Tax
It’s getting harder and harder for ecommerce sellers to avoid sales tax, no matter where their businesses are based. If the Marketplace Fairness Act passes, many more online retailers may be required to register to collect and pay sales taxes on remote sales, even in states where they have no nexus. So it makes sense to educate yourself about potential sales tax obligations, even if you run a business in one of the states with no sales tax.