Physical presence still matters when it comes to sales tax
- Sales and Use Tax
- September 27, 2018 | Gail Cole
Sales tax nexus is the connection between a business and a state that allows the state to tax that business’s sales. It used to be based solely on physical presence, but on June 21, 2018, the Supreme Court of the United States ruled that it could also be established by “economic and virtual contacts” with a state. Since that ruling (South Dakota v. Wayfair, Inc.), physical presence has received about as much attention as last week’s leftovers.
Yet physical presence remains the predominant sales tax collection trigger. Approximately 94 percent of all retail sales take place in the roughly 1.1 million brick-and-mortar stores located in the United States. Together, they account for $3.9 trillion, give or take, in annual sales. Ecommerce is quickly chipping away at that statistic, but there’s compelling evidence that brick-and-mortar is here to stay. If nothing else, it’s part of an omnichannel approach to sales.
Make no mistake: Ecommerce is convenient, and it’s on the rise. It allows us to shop anytime from anyplace with a signal strong enough to upload a website and complete a purchase. We can e-shop during night’s darkest hour, over morning coffee in pajamas, or when commuting by bus, boat, or train. Thanks to internet retail, we can shop while a chicken is roasting, or the children are sleeping, or when sickness has us tethered to the couch. That’s right, we can shop even after we’ve dropped.
But many if not most of us still crave the interactive, tactile experience and immediate gratification of brick and mortar, and some of the most successful ecommerce retailers have figured this out. Once solely available online, Amazon, Rent the Runway, and Warby Parker now have stores with doors. An omnichannel approach — which includes physical stores — is the way to go. And that will give your business nexus.
Physical presence: It’s not just about stores
Bear in mind that when it comes to triggering sales tax nexus, physical presence isn’t limited to retail spaces. Owning or leasing an office in another state will give you a physical presence and an obligation to collect and remit sales tax. Same goes for owning or leasing a warehouse or other facility. In fact, even indirectly using or occupying a physical space (e.g., through a subsidiary or agent) can trigger nexus in another state.
Furthermore, there are ways to establish a physical presence without four walls and a roof. Sending employees or agents to another state may trigger nexus, even if they’re only there briefly. Storing property in a facility in another state (as with Fulfillment by Amazon) can do the same. And a handful of states are now arguing that putting apps or software (e.g., web cookies) on an in-state computer or device gives a business physical presence nexus there, too.
Even though economic nexus is the star of the day, it’s important to remember physical presence when you’re thinking about sales tax. It triggers an obligation to collect and remit sales tax in 45 states plus the District of Columbia.
You can learn more sales tax nexus in all its forms at the Avalara sales tax nexus resource page.