The Impact of Not Charging Sales Tax in a Nexus State
- Sales Tax
- Jul 8, 2015 | Ryan O'Donnell
If you've taken the time to learn about sales tax, you've certainly learned about (or are are trying to understand) nexus. Make no mistake about it, nexus is a complicated topic. While it seems somewhat straightforward (a physical connection to a state sounds simple enough), there are enough edge cases, loopholes, and unexpected situations that pinning down exactly what triggers nexus can be maddening.
What we do know is this--once a business has nexus within a state they are responsible for collecting and remitting sales tax to the state and local tax authority. Moreover, the state and local government has the right to hold your business accountable for collecting, filing, and remitting said sales tax.
Who Pays the Sales Tax?
What does it mean to be held accountable for sales tax? Does it mean business owners are required by law to charge customers sales tax? Actually, it doesn't. What it means is the state tax authority has the right to legally hold your business accountable for the sales tax that should have been collected on taxable sales. That doesn't mean the buyer has to pay it. It means your business has to remit it and those two situations are very different.
Believe it or not, there are situations where businesses will actually not charge sales tax to the customer and opt instead to pay the sales tax out of their own pocket. Drop into the Amazon Seller Central Forums and you'll find merchants posting questions relating to this exact topic.
The key here is to recognize the difference between not charging sales tax at the point of sale and paying it to the state DOR later out of ones own pocket and not charging sales tax and not paying it at all. Obviously, these are very different scenarios with very different potential outcomes.
This is the point where business owners should consider the materiality of their tax situation and how it compares to their own tolerance for risk. Every business owner should ask themselves, "How much risk am I exposing myself to by not addressing sales tax compliance?"
Should you choose to continue to not collect sales tax, just be aware that you are exposing yourself to at least some risk of penalties and interest payments. True, the risk may be very small, but as your business grows, so grows your risk.
If you're an Amazon seller, you should be aware that Amazon is required by the IRS to file a Form 1099-K for sellers who meet the following sales thresholds in a single calendar year:
- More than $20,000 in unadjusted gross sales, and
- More than 200 transactions.
If you find yourself approaching these two sales milestones and you haven't started collecting sales tax in nexus states, you should strongly consider getting registered with the appropriate state and local taxing authorities so you can begin collecting sales tax. TrustFile can help you manage sales tax filing and save you hours of processing, preparing, and submitting your tax data.