By Mark Faggiano
If you are an online seller in the USA, you’re probably well aware that you are required to collect sales tax from buyers in your home state. But, as with just about anything to do with tax, it gets a little more complicated than that.
This post provides the fundamentals for sales tax nexus for online sellers, including what creates nexus, and what that means when it comes to collecting sales tax from your customers.
It covers the impact of using Amazon FBA (and other third-party fulfillment services) on sales tax nexus, how to determine whether a fulfillment service gives you nexus, and what to do if it does.
What is Sales Tax Nexus?
Forty-five US states and Washington DC have a sales tax. As determined in the Supreme Court case Quill v. North Dakota, these states can require any seller with “sales tax nexus” in the state to collect sales tax from buyers in that state.
Each state has its own sales tax laws and rules. There is currently no “national” sales tax. That means each state can create their own definition, to an extent, of what creates nexus in the state.
It’s true that you always have sales tax nexus in your home state (even if you work from your kitchen table), but other business activities can also create sales tax nexus in a state. Here are some of the most common factors that create sales tax nexus:
Location – An office, store, warehouse, sample room, or other location.
Personnel – An employee, salesperson, installer or independent contractor.
Inventory – Storing inventory for sale in a warehouse or other location.
Drop shipping – Having a vendor ship products to your customer will, in some cases, create sales tax nexus. Read more about drop shipping and sales tax here.
Third-party affiliate – In states with “click-through nexus”, a third-party who sends sales to your business in exchange for a cut of the profits creates sales tax nexus.
Temporary sales – Making sales at a temporary location in a state, such as at a tradeshow or craft fair.
A Sample State Nexus Law
For example, here’s an excerpt of what the state of Washington has to say about what creates nexus in the state:
For businesses making retail sales into Washington, a person is deemed to have a substantial nexus with this state if the person has a physical presence in this state, which need only be demonstrably more than a slightest presence. For nexus purposes, a person is physically present in this state if the person has property or employees in this state. A person is also physically present in this state if the person, either directly or through an agent or other representative, engages in activities in this state that are significantly associated with the person’s ability to establish or maintain a market for its products in this state. See RCW 82.04.067(6).
A few examples of nexus-creating activities include, but are not limited to:
Soliciting sales in this state through employees or other representatives
Installing or assembling goods in this state, either by employees or other representatives
Maintaining a stock of goods in this state
Renting or leasing tangible personal property
Providing services
Constructing, installing, repairing, maintaining real property or tangible personal property in this state
Making regular deliveries of goods into Washington using the taxpayer’s own vehicles
Until September 1, 2015, this physical presence nexus standard also applies to out-of-state businesses making wholesales sales into Washington. Effective September 1, 2015, nexus for most out-of-state wholesalers (as defined in RCW 82.04.257(1) and RCW 82.04.270) is based on economic nexus standards as described below.
You can read the entire Washington publication (with links to the Washington state tax code) here. And you can find out what every US state has to say about nexus here.
Sales Tax Nexus and Third-Party Fulfillment Services
Generally, states consider inventory stored within the state to create sales tax nexus for merchants.
This includes if you use a third-party fulfillment service like Amazon FBA.
For example, here’s what Pennsylvania has to say about sales tax nexus and, specifically, about storing inventory in a warehouse:
(b) Maintaining a place of business within this Commonwealth. A vendor who is engaged in one or more of the following activities, within this Commonwealth, is maintaining a place of business within this Commonwealth:
(1) Having or maintaining either directly or through a subsidiary, an office, distribution house, sales house, warehouse, service enterprise or other place of business irrespective of whether the place of business is located permanently or temporarily or authorized to do business within this Commonwealth.
(2) Having or maintaining an agent of general or restrictive authority irrespective of whether the agent is located permanently or temporarily or authorized to do business within this Commonwealth.
(3) Maintaining a stock of goods.
In most cases, storing inventory in a warehouse in a state (whether you own the warehouse or are using a third-party logistics service) creates sales tax nexus.
Two exceptions to this rule are New York, which does not consider that using third-party fulfillment creates sales tax nexus, and Virginia, which issued a similar letter ruling on the subject in 2015.
One of the most popular fulfillment services is Fulfillment by Amazon (FBA). As of this writing, Amazon fulfillment centers are located in 24 states, with more opening rapidly. (Note: Amazon has other types of storage facilities – including distribution centers and sort centers – where goods are not stored while being offered for sale and so do not create nexus for sellers.)
According to TaxJar’s data, the average FBA seller has inventory stored in Amazon fulfillment centers in 10 states.
But how do you determine whether a third-party fulfillment service gives you sales tax nexus? And then what do you do if it does?
What to Do If Using a Fulfillment Service Gives You Sales Tax Nexus
If you use third-party fulfillment, here’s how to get started discovering your sales tax obligations:
Determine where your inventory is being stored
The third-party service you use should be able to give you a report to show where your inventory is being stored. Some services only store your goods in one state, so that would be the only state where “inventory for sale” gives you sales tax nexus.
Amazon FBA, however, can be quite opaque about this. You can find the steps here to find out where Amazon is currently storing your inventory.
Register for a sales tax permit
If you do have sales tax nexus in a state then you are required to collect sales tax from buyers in that state, so be sure to register for a sales tax permit with the state first. States consider it unlawful to collect sales tax from buyers in their name without a sales tax permit.
Collect sales tax in all nexus states on all of your shopping carts and marketplaces
If you have nexus in a state, that means you are required to collect sales tax on every sale of a taxable item you make in that state. No matter on which shopping cart or marketplace you make the sale.
Example: You start out selling on Shopify and only having sales tax nexus in your home state of Illinois. But then you begin selling your products on Amazon FBA. You soon have items stored in Amazon fulfillment centers in 9 states, and register for a sales tax permit in each of those states. You are now required to collect sales tax from your Shopify buyers and your Amazon FBA buyers in the 10 states where you have sales tax nexus. If you add another platform, like eBay, into the mix, you are also required to charge your eBay buyers in those 10 states sales tax.
You can read more here about determining exactly how much sales tax to collect from your buyers.
US Sales Tax Nexus and International Sellers
Sales tax nexus can be highly confusing for international sellers. Some countries have tax treaties with the US federal government, but those only apply to income tax.
Since sales tax is governed at the state and not the federal level, states still consider any business that has nexus in the state to be on the hook for sales tax.
The same business factors – an employee, location goods in a warehouse, etc. – that create sales tax for sellers based in the US create sales tax nexus for international sellers.
Getting sales tax compliant can be more difficult for international sellers than for US sellers. When registering for a sales tax permit, you’ll need a US-based tax identification number, such as an Individual Taxpayer Identification Number (ITIN). For example, most states want you to pay your sales tax due with an ACH transfer from a US bank account. We recommend consulting a tax professional when dealing with US sales tax from outside the US.
Both of these CPA firms specialize in sales tax, and assist international sellers with its complexities:
Peisner & Johnson
Sylvia Dion, CPA
What is the Future of Sales Tax Nexus?
While there is currently no national sales tax law in the US, some lawmakers and trade organizations want to change that.
The Quill v. North Dakota court case set the precedent for what constitutes nexus way back in 1992, well before the ecommerce boom. Now that more and more people are buying products online, states claim they are seeing budget shortfalls due to uncollected sales tax.
Several states have passed far-reaching nexus laws in an attempt to coerce out-of-state retailers to register and collect sales tax. Some of these laws even blatantly fly in the face of the Quill precedent, in order to encourage lawsuits. The thinking on the states’ part is that if another Quill type of case appeared before the Supreme Court in today’s climate, a new more state-friendly sales tax precedent might be set.
There are also four internet sales tax laws kicking around Congress right now. They are:
The Marketplace Fairness Act
The Remote Transaction Parity Act
The No Regulation without Representation Act
The Sales Tax Simplification Act
Each of these would require retailers to collect sales tax from more customers, though some favor large online and brick and mortar retailers over the small and medium-sized businesses that make up the majority of US ecommerce businesses.
If any of these bills pass, they would change how nexus works in the United States.
You can stay up-to-date about developments in internet sales tax, and especially how they affect everyday ecommerce business owners, here.
Conclusion
I hope this quick primer has helped you understand the fundamentals of sales tax nexus. If you have questions about nexus, I recommend contacting a vetted sales tax expert or your state’s taxing authority (usually called the [State] Department of Revenue.)
Have questions or something to say? Start the conversation in the comments!
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