Navigating the Complexities of Sales Tax in the Ever-Changing Landscape of Online Selling (part 1)

Online selling of products and services has always been in the vanguard of sales tax obligations. The situation has only gotten more complicated in the five years since the Supreme Court unleashed economic nexus with the Wayfair decision.

Since, every state with a statewide sales tax (and countless localities, especially in places like California and Alaska) has enacted economic nexus laws, meaning e-commerce vendors of products and, increasingly, services must collect and remit sales tax and file sales tax returns with individual states.

Nexus thresholds can be a dollar amount in sales, a set number of sales or a combination. And of course, states’ thresholds vary widely, as do what products or services each state or tax jurisdiction considers taxable.

One industry’s details

Take manufacturing for instance. “Manufacturing” is often defined as a physical application of materials and labor to change the characteristics of tangible personal property (TPP). The industry depends on several terms regarding how sales tax impacts the industry.

Manufacturers often sell through wholesalers, and because of that they generally aren't selling directly to the public or charging sales tax. But, within the last 5 years and the boom of ecommerce, the ability to add an online shopping cart to a website has become a lot more common and many manufacturers have also started selling their products online. 

Sales made through your own website is subject to sales tax once you’ve established nexus. If you’ve registered for sales tax purposes in any states, including states in which you have a physical presence (office, warehouse, inventory storage, etc..), you are required to collect sales tax from customers based in those locations. For customers outside of those locations, you will need to monitor economic nexus thresholds similar to any other eCommerce business. But it is not only the revenue and transactions from your own site that you need to monitor. For many states, gross receipts count toward economic nexus thresholds – and gross receipts of sales for a manufacturer/wholesaler can be a significant portion of your sales.

Suppose you hit a state’s economic nexus threshold of $100,000 in sales into that state for a year. Of that $100,000, it’s quite possible that $80,000 comes from wholesale transactions where no sales tax was collected and the remaining $20,000 is related to direct sales from your e-commerce site. The combination of wholesale transactions and direct sales puts you at the economic nexus threshold – requiring you to register for sales tax and begin collecting and remitting sales tax on the $20,000 of taxable sales.

It's not as easy as one would think. In short, manufacturers selling products off their own website as well as through other channels may have nexus in more states than they realize – and more filing obligations.

TaxConnex has assisted companies in many industries alleviate the burden of sales tax. Contact us to learn more about how we can take sales tax off your plate entirely, and check out our webinar on sales tax complexities within the manufacturing industry.