Taxable sales of products direct to end users has been a staple of business for ages. One relatively new development is the complex overlay of sales tax on these transactions.
Add internet sales to the mix and you’ve got sales tax obligations sprouting up these days more than ever.
Nearly half the attendees of a recent TaxConnex webinar on multi-channel selling use direct/retail eCommerce as their main avenue of sales. (About half managed sales tax compliance completely internally and about a third managed it with technology and some internal personnel.)
Any way you handle it, sales tax is getting harder to properly, legally and completely comply with.
Assessing your footprint
Sales tax nexus is the concept that enables state and local governments to require businesses to collect and remit sales tax on the products and services they sell. For some 50 years, we’ve operated under a physical presence test for sales tax obligations. Offices, other property inventory, sales reps, conference attendees and even just third-party technicians and other service personnel in a state: All these could ignite physical sales tax nexus for a company.
(For most part, we use a three-day rule: If an activity for your company exists for three or more days in a state for a 12-month period, that falls into a category of risk for creating physical nexus.)
Economic nexus has emerged as a burning issue for many online retailers since the 2018 decision of South Dakota vs. Wayfair, in which the U.S. Supreme Court ruled that the state of South Dakota could require businesses with no physical presence in the state to collect sales tax. In South Dakota, the threshold for establishing economic nexus is $100,000 in sales or 200 individual transactions a year. As a result of Wayfair, South Dakota is estimated to receive tens of millions of dollars annually in revenues from out-of-state sellers.
Such revenue is hard for tax jurisdictions to ignore. Today of the 45 states that have a sales tax, all (and D.C.) now have economic nexus laws. Missouri’s new law kicks in next Jan. 1, and Alaska is working hard on the concept. Some 10,000-plus local jurisdictions’ taxes can also accompany state sales taxes.
How do you calculate your tax?
States’ economic nexus thresholds (generally number of transactions, a dollar amount or both) vary a lot. It’s a safe bet, though, that if your company is selling more than $100,000 a year into any one state, you ought to ask if you’ve triggered sales tax nexus no matter what channels you use to make direct/retail sales.
Other points to keep in mind when trying to calculate your sales tax obligations:
Taxability. This can be complex, but essentially you’re asking if your product or service is taxable in a state where you have nexus. Tangible personal property is generally taxable unless specifically identified as exempt. Services tend to not be taxable, but this is changing state by state. There’s also a host of exemptions out there.
Situsing. “Situs” means position or site. For sales tax purposes, it is generally the jurisdiction in which a sale of TPP or taxable services occurs. Services that may be taxable in some states, for instance, may be invoiced in one location (state) but the benefit of the service is received in multiple states. (Where is the determination of taxability based? We hear this question frequently.)
The sales tax calculation comes down to rules, rates and the nexus footprint of a business. Some companies can use native solutions within their accounting software or shopping cart; plug-ins solutions can also integrate into the shopping cart or the invoicing system to facilitate the calculation. If your company is selling in just a few states, you might be able to get by with simple tax rate subscriptions.
In sales tax, there’s enough ambiguity and nuances so that if you establish a simple compliance strategy for one state and try to employ it across all states, you’re likely at risk. But it’s never a good idea to guess about your sales tax obligations.
(Check out our recent webinar, Multi-Channel Selling & Your Sales Tax Obligations.)
Get your sales tax in order by talking to an expert – TaxConnex provides sales tax consulting and compliance assistance to ensure you are making the right choices when it comes to managing your on-going compliance. Get in touch to learn about our white-glove service offerings!