The Maker Movement and Sales Tax
- Jun 23, 2015 | Avalara
Have you seen the Flow Hive, a device created to attached to a beehive and let beekeepers harvest honey with minimal impact on the bees? How about C.H.I.P., the world’s first $9 computer, which by June had raised more than $2 million on Kickstarter?
These and inventions around the world are part of the maker movement, a culture of handy, do-it-yourself types that outdo each other with clever science and art projects. Some of them are turning into real businesses, which opens up some interesting questions around selling and sales tax.
DIY to Business
As a mix of a technology lab and an artist salon, the maker movement is gaining momentum across the country for people who prefer to “learn by doing” and invent things from objects found discarded in piles of scrap metal. Innovative endeavors on Kickstarter and Indiegogo are drawing big interest and even bigger funding.
But while anyone with a vision and an interested crowd of supporters can become a manufacturer overnight, running what can become a business straight out of the garage. Many makers advance themselves from hobbyists to business owners.
But that step up requires a lot of considerations beyond laser-cutting and soldering, among them taxation.
Sales Tax Hinges on Nexus
Manufacturing is a complicated endeavor, so makers may not always know the best way or how much to charge customers sales tax when one of their creations sells.
For example, if a business is running in someone’s garage in San Mateo but he or she has a family member ship some products from Seattle, which sales tax rates apply? California internet sales tax differs from Washington internet sales tax, and, in some cases, sales tax rules and rates even change within the state.
The question makers want to wrap their head around to understand their sales tax exposure is whether one's business has a substantial link or connection to the state in question. A situation termed, "nexus."
There are a certain set of criteria that apply when considering your business nexus, or how much business you conduct in one place to warrant sales tax collection. It is hard to try to automate this determination on your own, because several states don’t collect sales tax (Alaska, Delaware, Hawaii, Montana, New Hampshire, and Oregon) and the point at which nexus is triggered is largely dependent on your own tolerance for risk.
3D Printing Raises Tax Questions
One major tax questions related to the maker movement is how the rise of 3D printing will affect sales taxation. How does one tax a product that the consumer prints at home based on a blueprint purchased elsewhere? Keep in mind that blueprints are primarily digital these days.
3D printing technology is also radically changing manufacturing worldwide, which has other tax implications. If companies can print their own parts right on a production line, do their sales and use tax exemptions still apply?
This is no academic question: Some experts predict the 3D printing market will be a $10 billion market by 2020.
There are a variety of ways taxes can be collected if goods change hands digitally as plans for a 3D printer instead of in finished physical form. It may be the transaction will be taxed in the place the blueprint is sold or 3D printers may be taxed directly.
The maker movement is pushing boundaries all over the place, including in the tax code. And we have yet to see what the IRS will make--so to speak--of all these changes.