US Sales Tax for European Online Sellers: The Essential Guide

By Emma Scotton

Ecommerce is booming and businesses are increasingly fighting for a share of the lucrative global market by looking at ways to take their online business cross-border.

The US market makes for a particularly attractive option, with US consumers expected to spend $327 billion online in 2016. Moreover, the number of web shoppers in the US is expected to grow by 15% this year to 192 million and each shopper will be spending more on average, up 44% from 2012 to $1,738 per year.

What’s more for marketplace sellers is that global marketplaces are expected to own nearly 40% of the online retail market by 2020, providing a viable and rewarding route to new markets for businesses of all sizes.

In the rush to expand, however, merchants can overlook areas of international business that are unfamiliar. Ensuring you support international payments and have a logistics network capable of fulfilling orders is important, but with new opportunities come new complexities, particularly when meeting the challenge of sales tax compliance in the United States.

Businesses in Europe are used to dealing with transactional taxes in the form of VAT, but US sales tax is a different prospect entirely.

With over 12,000 taxing jurisdictions throughout the US, each empowered to alter rates and rules with little oversight, the complexity for companies trading in the US becomes mind-boggling. There are 100,000+ rules and boundary changes annually, so it’s easy to see why many companies require outside expertise to manage what initially seems like a straightforward process.

On which items do you charge sales tax? What rate of sales tax do you need to charge for different addresses on the same street? What is the difference between state, county, city and special taxes? Where do you need to file and remit sales tax? What records need to be kept in case of audit? How often do you file taxes and to which authority? And what on earth is nexus?

These are just some of the questions merchants will need to consider before either selling or planning to sell in the US. It’s a veritable minefield of legislation, regulation and complexity but if you get it right the rewards for your business could be sizeable.

What is sales tax?

As revenue from property taxes collapsed during the Great Depression in the 1930s, US states implemented transactional taxes on commodities. As an indirect tax (a tax levied on goods and services), sales tax requires the seller to collect funds from the consumer at the point of purchase.

Today, there are over 12,000 state, county and city jurisdictions in the US charging a sales tax. Forty-five states and the District of Columbia now impose a sales tax on retail sales and some services. The bulk of their revenue is now generated from sales taxes, not income taxes.

The five states that do not have a state-wide general sales tax are Alaska, Delaware, Montana, New Hampshire and Oregon, although Alaska and Montana do allow localities to charge local sales taxes.

How does sales tax differ from Value Added Tax (VAT)?

Many European businesses are familiar with VAT and may assume that they can apply current processes to US sales tax. However, VAT is applied every time value is added at each stage during the supply chain, whereas sales tax is collected only at the time of the final sale.

If a seller has nexus in a state (more on that below) they must collect sales tax on all taxable sales to customers in that state, regardless of the channel.

Just how complex is sales tax?

Depending on the state in which your customer is based, different items may be taxed at different rates. In some states, for example, food is not taxed, while in others the same item may be classified differently. So far so good.

In New York, clothing and footwear costing less than $110 per item/pair is exempt from state sales tax, yet it is still subject to local sales tax in some jurisdictions. Local jurisdictions can change their tax policy towards clothing once a year, however, “most fabric, thread, yarn, buttons, snaps, hooks, zippers and similar items that become a physical component of clothing” or are used to repair it are exempt.

To be compliant, a retailer needs to know the correct classification of an item in each state to ensure it collects and remits the correct level of tax. Collecting too much in one state will make them uncompetitive, while not collecting enough increases their exposure to potential fines. Adding to the complexity, in some states the rates can vary by city, county, or even street. Two adjacent properties can have different tax rates.

What is the risk if you’re not compliant with sales tax regulations?

In an effort to safeguard tax revenues, each state conducts audits of businesses, which may result in penalties and interest. Businesses must keep records of sales in each US city, county and state in which they sell. California alone announced in August 2014 the hiring of 100 auditors, lawyers and specialists to help collect online sales tax.

As more businesses sell in the US, auditors are also turning to international sellers to ensure they do not have a competitive advantage over domestic retailers. The financial importance of collecting sales tax on a state cannot be underestimated. The more auditors assessing international businesses, the more revenue a state can make in penalties and unpaid tax.

With the average audit costing as much as €79,000 (US $100,000) you can’t afford to be complacent about compliance.

What is nexus?
The good news is international businesses selling in the US are not required to collect sales tax in a state unless they have “nexus”.

Nexus is defined as a connection or business presence in a state or jurisdiction. If you have nexus in a state, you need to collect and remit sales tax according to their regulations.

How do you determine if you have nexus?

On the face of it, for a marketplace seller, it sounds like you need not be concerned with Sales Tax. However, here comes the bad news. Activities leading to having nexus vary per state and can include activities such as opening offices, stores or franchises, storing items in warehouses or even attending meetings or tradeshows.

Determining nexus can be confusing if you are unprepared or do not fully understand the obligations. This will ultimately increase your business’ exposure during potential sales tax audits.

Once you have determined where nexus exists for your business, you are required to calculate, collect, report and remit that state’s sales tax. There are several scenarios where nexus can be applied to marketplace sellers giving you a “significant physical presence”, and these should also be considered before you start selling to US consumers.

What constitutes a “significant physical presence”?
Nexus rules are established by individual states and every state defines them uniquely.

Determining exactly how a rule applies to a business is critical. With more than 12,000 sales tax jurisdictions across North America, and with rates and boundaries constantly changing, staying on top of nexus responsibilities is a substantial drain on businesses, carrying no benefit to the bottom line.

Recently, in an effort to avoid losing taxes, many states have enacted Amazon laws, requiring more national and international online retailers to collect sales tax for the first time. These laws expanded definitions of nexus to include online-specific relationships such as affiliate and web advertising.

As a marketplace seller, you will need to consider closely the ways in which you manage your fulfillment as a number of scenarios here may trigger nexus.

Nexus triggers

The following scenarios are some of the more common situations in which marketplace sellers can trigger nexus.

Owning or leasing property or warehouses in the US

To better serve US consumers, and for cost-effective delivery, many marketplace sellers opt to store inventory in the US itself. Whether you decide to own or lease property in the US for this purpose, or you decide to rent or own storage or warehousing facilities, this will be considered a nexus-triggering activity. You will therefore be required to register, collect and remit Sales Tax for sales in the state in which your property, storage or warehouses are located.

Using a third party fulfillment provider with a presence in the US

Similarly, some marketplace sellers may decide to outsource elements of their supply-chain to a third-party, who will store and deliver goods to customers on their behalf. This method of fulfillment can prove cost-effective for businesses and enable you to get goods to your US customers much quicker. However, even if you outsource to a third party, and it is the third party who owns the warehouse and delivers your goods in the US, this can still trigger nexus.

Let’s take Fulfillment by Amazon (FBA) as an example. FBA helps sellers sell products internationally by giving you access to Amazon’s logistics network. If you ship your products to their fulfillment centers, they’ll store, pick, pack and ship it locally to your customers.

Whilst the definition of nexus varies slightly from state to state, all states where Amazon has warehouses (with the exception of Virginia) say the same thing, namely that this suffices for the creation of nexus. For example, Kansas regulations state that “stocking inventory in a Kansas warehouse or consignment” triggers nexus. Similarly, Washington regulations state that where “the goods are located in Washington at the time of sale and the goods are received by the customer or its agent in this state” nexus will be triggered.

Amazon won’t always notify you if they move your inventory to a new fulfillment centre. So a conservative approach is to register for Sales Tax in all the states where Amazon has a fulfillment centre to avoid getting caught out. It should also be noted that once you have nexus in a state you must collect tax on all sales into that state whether or not you ship them yourself or through a third party.

Drop-shipping methods
Many retailers and marketplace sellers utilize drop-shipping as a supply-chain management technique. In this scenario, the retailer does not keep the goods in stock but instead transfers customer orders and shipment details to either the manufacturer, another retailer or a wholesaler who then ships the goods directly to the customer. This triangular situation adds a layer of complexity when it comes to determining nexus.

If both you as the retailer and your drop-shipper are situated outside of the US, and thus have no nexus in the state of your US customer, it will be the customer who is subject to “use” tax.

But if your drop-shipper is located in, or has nexus in, the state in which the sale occurs, then the drop-shipper could be responsible for collecting sales tax. That said, the rules vary again across different states, and in certain circumstances use of an in-state drop-shipper by an out-of-state retailer is a nexus-creating relationship, and it will be the seller who will be responsible for collecting the sales tax. In other states de minimis thresholds apply, whereby nexus is triggered only once the retailer or the drop-shipper have shipped $50,000+ worth of goods.

With this degree of complexity, sellers must ensure they plan ahead. All members of the supply-chain must cooperate to determine nexus to avoid either double-charging for sales tax or not charging at all.

Determining nexus
To safely navigate these challenging tax rules, businesses should understand their exposure as part of a nexus study. Making the nexus determination on your own is difficult, confusing and can lead to problems further down the road.

Other sales tax rules
This complexity doesn’t end at nexus! Sales tax compliance is full of complicated rules and nexus is just one aspect. Several other layers must also be considered in order to be fully compliant.

Some bizarre but very real sales tax laws:

In New York, any bagel that has been sliced or prepared with toppings is subject to a sales tax. However, if it is sold whole and consumed outside of the store, it is untaxed.

Alabama charges a 10-cent tax on any pack of cards that contains 54 or fewer cards in the deck. The seller must also pay $1 and an annual tax of $3.

Pennsylvania taxes air – at least the air that comes out of a compressed air vending machine or vacuuming vending machine. Therefore, petrol stations must charge the tax when customers pump up their tyres. Also in Pennsylvania, state and US flags are not subject to tax, but if either is sold with “accessories” (i.e. a pole), the entire purchase becomes taxable.

In New Jersey, naturally carbonated water is exempt, but artificially carbonated water is taxable.
And finally… in Tennessee, the sale of a good is subject not only to the state sales tax of 7%, but the local sales tax on the first $1,600, plus an additional state sales tax of 2.75% on the second $1,600, all of which cannot exceed $3,200 – potentially subjecting a sale to a 9.75% sales tax rate.

Top points to consider before selling into the US

1. Keep up to date with each state’s tax requirements
Businesses need to keep up to speed on all the changes made by states and municipalities each year. These changes include rate increases/decreases as well as new sales taxes added to jurisdictions, and boundary changes.

2. Establish processes for water-tight record keeping
The best way to stay compliant is to keep up to date on filing sales tax returns and payments (quarterly or monthly, depending on the state’s requirements) and keep accurate and detailed sales records.

What records do businesses need to keep?

Sales invoices
Paid bills
Contracts
Purchase orders
Register tapes
Bank statements
Cancelled cheques and similar original documents
Depreciation schedules and other fixed asset records
Documents supporting tax-exempt sales, such as resale and other exemption
Certificates
Freight bills indicating shipments to addresses across states
Keeping records and preparing and filing sales tax returns can be a major headache, particularly for small businesses. The good news is there are tools available that automate these processes, reduce this tedious and labour-intensive task, and save you money in the long run.

3. Understand your nexus requirements
As outlined above, nexus-triggering events can be complicated and vary across states and product types. The way in which you deliver the goods sold to US customers will have implications for your tax obligations. Using any third party, whether it’s a drop-shipper, carrier or warehouse can trigger nexus for your business, so consulting with experts will be critical.

4. Plan to use geo-location over ZIP codes
While the US Postal Service has established ZIP codes for mail delivery, tax jurisdictions do not generally follow ZIP codes. Going down to street level is essential to get it right. Businesses relying solely on ZIP code often find big discrepancies during audits.

In order to help businesses cope with these differences, providers of automated solutions continually research the physical boundaries of taxing jurisdictions nationwide. Without the use of geospatial technology, there is limited chance of accurately determining which jurisdiction applies to a transaction.

5. Set out your returns filing and remittance schedule
Each US state has its own set of rules and regulations for filing and remitting tax, which may differ from other states. In addition to state rules, cities and counties may impose and manage sales tax returns on their own.

Responsibility lies with businesses to not only determine if they have to file with specific cities and counties, but also to register of their own accord. Moreover, filing frequencies vary by jurisdiction so not all returns are due on the same day of the month. When dealing with multiple states and local jurisdictions, the number of due dates and filing schedules that must be managed can be daunting.

Filing methods can vary just as much, even within the same state or municipality. Some states now require sales tax returns to be filed electronically; others still require hard copy submission, while a few states offer online filing along with an electronic data interchange (EDI) option.

6. Collect and store all exemption certificates
Not everyone is required to pay sales tax. Depending on the rules in the taxing jurisdiction, certain businesses and individuals may be exempt. The vendor must collect and keep on file a valid exemption certificate for each business, organization or individual with an exemption.

It is also up to vendors to ensure that exemption certificates are valid for each sale transaction. This requires businesses to keep a copy of each exemption certificate and ensure that they are renewed when they expire.

7. Identify if the “Streamlined Sales & Use Tax Agreement” is right for you
Around half of the states have worked together on an agreement called the Streamlined Sales and Use Tax Agreement, designed to “simplify and modernize sales and use tax administration in order to substantially reduce the burden of tax compliance.” Signing up to SST requires only one form to register across all SST states. Once registered, businesses then have to file returns every month in all SST states.

For companies selling, or looking to sell in the US, or have affiliate relationships in a number of states, registering as an SST volunteer can save you a lot of time, effort and money. There is no cost for registration and if you qualify, filing is a free service across the SST states. SST volunteers have limited audit exposure (no negative audits are possible).

As of early 2015, SST Member States include:

Arkansas
Georgia
Indiana
Iowa
Kansas
Kentucky
Michigan
Minnesota
Nebraska
Nevada
New Jersey
North Carolina
North Dakota
Oklahoma
Ohio
Rhode Island
South Dakota
Utah
Vermont
Washington
West Virginia
Wisconsin
Wyoming

8. Plan for sales tax holidays
Further complicating the matter, dozens of states also declare sales tax holidays. Some states offer tax reprieves for products like school supplies for kids, while others give consumers a tax break on hurricane preparedness items, like plywood and nails. In states where hunting is a big business, tax holidays might be in place for firearms, ammunition and hunting supplies.

The holidays are varied and complicated, often taking place over specified dates and limiting the number of items that can be purchased tax-free.

In Virginia, for example, during the sales tax holiday for clothing and school supplies, many items are singled out as exempt. For clothing, this includes clerical vestments, choir and alter clothing, corsets, girdles, lingerie, purchased costumes, steel-toed shoes, suspenders, formal wear, etc. However, protective gloves, hard hats and helmets are taxable. School supplies that are exempt include calculators, binders, erasers, lunch boxes, highlighters, notebooks, paintbrushes, scissors, etc.

Keeping up to date with these tax holidays may seem burdensome, but could actually prove part of a rewarding marketing strategy and help you to take advantage of peak selling times.

Steps to successful market-entry in the US

International trade is a great way to grow your business, so don’t be put off by the complexities of sales tax. Expansion need not be daunting and provided you take the right steps, selling your products in American markets could be the boost your business needs.

Work out where your business has nexus, so you know in which states you’ll need to register by declaring your business.

Get your ID number by setting up an account with a state, and visit their local “.gov” website to determine the exact steps. Usually they will have you file a form and register.

Once that is complete, you will have a unique code applied to your business and this code will show up along with your business name in all future sales tax filings.

As soon as you have completed your paperwork, make sure to check that same regulatory department for up-to-date rates, tables, rules, and boundaries.

Research the taxability of your items, making sure to apply thresholds and tax holidays if they apply in the state.

Make sure that you only have to file one sales tax form in one state, as many states require remittance to local jurisdictions (which can number in the hundreds), as well as the state.

Alternatively, there are a number of solutions available to merchants to help automate and take the administrative burden out of US sales tax. You can speak to the KnowGlobal team to find out more.

(SOURCE)

Give Your Amazon Business a 2017 Sales Tax Checkup

By Kym Ellis

The beginning of a new year is a fantastic time to evaluate what went right (and wrong) in the previous year, and make big plans to kick butt in the year to come. As a business owner, it’s worth it to take this time to assess your current business processes and decide if there’s anyway you can “work smarter, not harder.”

One business process that tends to bog ecommerce sellers down is sales tax.

Sales tax is an ubiquitous administrative hassle. Most everyone has to deal with it, but since states don’t provide great guidance on exactly how to collect and file, many online sellers can’t feel confident they’re doing sales tax “correctly.”

That’s where giving your sales tax processes a good once-over comes in. Read on to find out how to evaluate your sales tax activities now so you can get on with a happy and prosperous 2017!

Why should you give yourself a sales tax checkup?

Forty-five U.S. state and Washington D.C. all have a sales tax. Any retailer, including online sellers, is required to collect sales tax from buyers in states where they have nexus (more on that below). Retailers collect a percentage of sales tax on each taxable sale and then remit those funds to the state.

States and local areas (such as cities, counties and other special taxing districts) use the money collected by retailers to pay for budget items like schools, transportation and public safety. Many U.S. states and localities make the majority of their revenue from sales tax, so they are very interested in making sure that retailers collect, file and remit sales tax!

That said, you should never have to pay sales tax out of pocket! Sales tax is a “pass through tax,” meaning that you collect it from your customer and pass it on to the state. You should never spend your own profits to comply with state sales tax laws.

Ready for your checkup? Let’s dig in.

Take Stock

Ask yourself how much time you spent on sales tax last year? If you spent more than a few minutes per filing, you’re probably spending too much time on an administrative activity that doesn’t make your business a profit.

Also, what nags at or concerns you every time you file a sales tax return? Are you afraid you aren’t filling out all of the cities, counties and districts correctly? Or afraid you aren’t collecting the right amount of sales tax from your customers in the first place? Maybe you sell on multiple channels and aren’t sure you’re collecting the right amount of sales tax on each.

Before you can fix the problem, first know what it is!

Determine Where You Have Sales Tax Nexus

As a retailer, you are only required to collect sales tax from customers in states where you have sales tax nexus. Sales tax nexus is just a legalese way of saying “a significant connection” to a state. Though every state’s nexus laws are slightly different, nexus is generally created in the following ways:

• A location – an office, warehouse, store, or other physical place of business
• Personnel – an employee, contractor, salesperson, installer or other person doing work for your business
• Inventory – Most states consider storing inventory in the state to cause nexus even if you have no other place of business or personnel
• Affiliates – Someone who advertises your products in exchange for a cut of the profits creates nexus in many states
• A drop shipping relationship – If you have a 3rd party ship to your buyers, you may create nexus
• Selling products temporarily at a tradeshow or other event – Some states consider you to have nexus even if you only sell there temporarily

You can see what creates sales tax nexus in each state here.

The first of the year is a good time to double check if your recent business activities may have caused you to have sales tax nexus in a new state.

If you do find that you have sales tax nexus in a new state, you should register for a sales tax permit in that state and begin collecting sales tax. Don’t skip this step! Collecting sales tax without a permit is illegal. (States think you’re keeping their money for yourself!)

On the other hand, you may have stopped doing certain business activities that gave you sales tax nexus. If you find that you no longer have nexus in a state, you can cancel your sales tax permit in that state. When you do, just double check with the state to make sure they don’t have any “trailing nexus” provision that require you to collect sales tax for a few months to year after your nexus in the state has been abolished.

Also, once you’ve cancelled your sales tax permit in a state, be sure you are no longer collecting sales tax from buyers in that state on any of the online shopping carts and marketplaces on which you sell. One of the biggest mistakes we see at TaxJar is online sellers forgetting to collect (or stop collecting) sales tax on one of their carts or marketplaces.

Know Your Sales Tax Filing Frequency

You’re not the only person who will be completing a sales tax checkup at the beginning of the year. Many states do, too! And this may mean that they change your sales tax filing frequency.

You were assigned a filing frequency when you first signed up for your sales tax permit. At that time, your state assigned you to pay sales tax either monthly, quarterly or annually.

States generally assign you to file and pay sales tax more often if you are a high-volume seller. Around this time of year, some states will evaluate the amount of sales tax you are collecting and remitting over a period of time. Then they will change your filing frequency to either more or less often. Be on the lookout for a letter or other communication from your state’s department of revenue in case they change your filing frequency!

Know Your Sales Tax Filing Due Dates

Once you are sure of your sales tax filing frequency, you should the note your sales tax filing due dates.

In the majority of states, sales tax is due on the 20th of the month after the filing period. For example, if you are a quarterly sales tax filer in the state of Georgia, your Q1 sales tax return would be on April 20th – the 20th day of the month after Q1 is over.

Other states want to hear from you on different days. California’s sales tax filing due date isn’t until the last day of the month after the filing period. Florida’s sales tax filing is technically due on the first day of the month after the filing period ends. But you have until the 20th of the month before the filing is considered late.

It’s important that you pay on time, because every state assesses penalties and interest for late filings. Plus, about half the states with a sales tax offer sales tax discounts (generally, a very small percentage of the amount of sales tax you collected) to businesses that file on time!

Your Sales Tax Processes as an Amazon Seller

There are a few reasons why you may be spending too much time on your sales tax returns. You may sell on multiple channels and have a hard time reconciling all of your sales. Or you may find yourself spending hours filling out your sales tax amounts collected within in each state, county, city and special taxing district.

If this is too time consuming, you can use a sales tax automation solution to make your sales tax life simple. You can connect each of the online shopping carts and marketplaces you sell on. From there, you’ll receive a return-ready sales tax report with your sales broken down just the way your state wants to see them. You can even AutoFile your sales tax in most states, meaning you never need to look at your sales tax filings ever again.

Sales tax is a necessary part of your business, but it doesn’t make you any money. If you’re spending too much time on sales tax, try automating it so you can get back to doing what you do best – running your business.

(SOURCE)

How to Navigate the January Sales Tax Perfect Storm

By Mark Faggiano

A storm is coming… 

If you’re an online seller, you can virtually guarantee that you will have a tax deadline in January.

At TaxJar, we call January the “Sales Tax Perfect Storm”. It pays to get your ducks in a row now before holiday returns season kicks into full swing. Next thing you know, it’s already January 15th, and you have to file your sales tax return by the 20th. Yikes!

To get ready, we’ve put together a few steps to help you file your January sales tax returns as soon as you’re done celebrating the arrival of 2017:

Find your January sales tax filing due dates

Every state’s January sales tax due dates are slightly different. Here’s a list of when sales tax is due in January for every state.

Report your owed sales tax for each state where you have sales tax nexus.

Sales tax nexus typically means having “significant” presence in a state. If you have a nexus you will be required to file sales tax returns for that state.

You’ll always have nexus in your home state, but if you have remote workers, sell at craft fairs, or stock merchandise in warehouses in other states, you may have nexus in other states too!

Here’s a guide to help determine if you have nexus in a state.

File your January sales tax returns

After you’ve figured out the source and amount of sales tax you’ve collected, you’ve done the hardest part of the job–now you just need to file the return!

There are usually a few different options for filing:

• Filing online:

To file online, you’ll need to find your state’s sales tax portal website, fill out the detailed form, and submit payment through its system. Sometimes this is the same system as the portal, but usually not. (Though they’re working on it, states are just not that tech-savvy yet.)

• File by mail:

In 2017 many states allow you to file tax returns the same way most people did in the 1930s, but other states are discontinuing the option to mail in returns. You can find out for sure on the state’s Department of Revenue website.

• AutoFile:

With this option, TaxJar will file your sales tax returns for you in nearly every state. You won’t need to complete any forms; it’s all done automatically. AutoFile is even smart enough to figure out if your state has a tax discount for filing on time and will apply that discount automatically!

No matter which of these methods you choose, you should make sure you file for every state where you have nexus, even if you owe no sales tax for that filing period.

Prepare for Your Next Sales Tax Filing

After January 1st arrives, keep track of any new states where you may have established nexus and make sure to register for permits in those states as soon as you discover you have nexus there–you can’t legally collect sales tax until you’ve received your permit for that state.

On the other hand, you may discover that you no longer have nexus in a state anymore. If that happens, contact the state’s department of revenue and let them know as soon as possible so you can begin ending your business relationship with that state. In some states you may have “trailing nexus” and have to keep filing for a set period after your reason for having nexus has ended, so it’s important to check that state’s regulations.

By this point in the process, you will have filed your tax returns for each of the states in which you have nexus and you can now get back to business. We know that sales tax compliance is never fun, but having a system to automate your pain away helps keep the hassles at bay and leaves you more time to deal with keeping (or not keeping) your New Year’s Resolutions.

(SOURCE)

Sales Tax Nexus for Online Sellers: Amazon FBA, 3PLs and More

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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