The art of understanding sales tax nexus: a guide for crafty sellers
- Sales and Use Tax
- October 30, 2015 | Gail Cole
There’s nary a nip in the air, but the holiday crescendo is building. We’re fine-tuning our Thanksgiving menus. We’re planning travel with the precision of a military strategist. We’re making our lists of naughty and nice.
For the really nice, many shoppers will seek unique, hand-crafted items. Those of us with adequate time and patience will take to local holiday bazaars and craft fairs, where there is usually at least one treasure worth the hunt. Those of us with less time and a strong Internet connection will shop for unique, one-of-a-kind products on Etsy and its new rival, Handmade at Amazon.
The months ahead are essential for retailers. Before the last of the Thanksgiving leftovers have been devoured (in some cases, before the first turkey is even carved), gift shopping begins in earnest. This is the time when retailers of all sizes — even new and small sellers — can make bank.
Success brings responsibility. In particular, it can trigger nexus, the connection between a taxing jurisdiction and a business that can lead to sales and use tax reporting and remittance. And if you have to charge your customers sales tax, you have to charge them the proper amount of sales tax.
To sell your craft, you have to make it and keep it somewhere. You have to advertise so people will find you (your mothers’ friends don’t count). You have to get your hand-crafted products into the hands of your customers. Read on for a snapshot of how storing, advertising, and delivering your product can create nexus.
If you sell through Etsy, chances are you store your product where you live or work. While this arrangement may at times feel cramped, it has at least one perk: You are unlikely to trigger a sales tax obligation in another state.
If you sell through Handmade at Amazon and participate in the Fulfillment by Amazon program, your products are unlikely to be underfoot. In fact, you may not know where they are. FBA sellers store products at Amazon facilities, located in more than a dozen states nationwide, and leave order fulfillment to the giant. It’s convenient, but it has a downside. At minimum, nexus is created in a state when a business has a physical presence there. If you don’t know where your product is located, you don’t know where you have a physical presence and you don’t know where you have nexus.
Whether you sell through Handmade at Amazon or Etsy, you likely advertise. And unless your advertising efforts begin and end with neighbor kids stuffing flyers in mailboxes, you probably advertise online. You may even attend a trade show or two (which can trigger nexus).
If you advertise online, you may inadvertently trigger nexus in another state. Numerous states have enacted affiliate nexus or click-through nexus legislation, which require out-of-state businesses to register and collect sales tax. More than a dozen states have affiliate or click-through nexus policies in place, including Arkansas, California, Connecticut, Georgia, Kansas, Maine, Minnesota, Missouri, North Carolina, New York, Pennsylvania, and Rhode Island.
Once customers have found you, you need to deliver the goods. If you sell through Etsy, you probably package and ship your product yourself. So long as you ship by common carrier, you are unlikely to trigger a sales tax obligation through delivery. Use another delivery method and all bets are off: You could establish nexus and the need to collect and remit sales tax.
Handmade at Amazon sellers who use Fulfillment by Amazon shouldn’t be held liable for sales tax based on Amazon’s usual delivery systems (USPS, UPS, and FedEx). Yet Amazon is ever the innovator. The enormous etailer has launched Amazon Flex, an Uber-like model whereby regular Joes deliver packages the way regular Joes drive cars full of people. Currently available in a limited number of cities, it will likely grow and it could have tax implications.
Amazon ships a mind-boggling average of 3.5 million packages each day. With that kind of volume, the company is forced to consider multiple viable delivery options. Thus the futuristic delivery-by-drone option that Amazon is developing. (What happens if a drone flies over or crash lands in another tax jurisdiction?) The company is also quietly testing letting vendors ship directly to Prime members.
Monitor nexus-creating activities
The nexus landscape is organic, ever-changing. In 2013 alone, seven states added laws creating new sales tax obligations for out-of-state retailers. More have been created since then, most recently in Nevada and Washington. Vermont is standing at the ready. The simple truth is, sales tax states want and need sales tax revenue.
As your business grows, your sales tax needs will, too. Read How Nexus Confusion Affects Your Business. You can deal with tax yourself, with tax rate tables and patience. Or you can save the time and the hassle and automate. See how automated filing and reporting works.