As if understanding your nexus obligations wasn’t confusing enough, you throw in words and phrases like marketplace facilitator, TPP, tax situs and economic vs. physical nexus and even the most advanced finance professionals can be thrown for a loop.
Let’s take a look at some of the terms associated with sales tax and their definitions.
In 2018, South Dakota vs Wayfair, Inc. led to the largest change in sales tax in the last 50 years, redefining nexus as a certain amount of sales and/or a certain number of transactions in a state or jurisdiction. This is now referred to as economic nexus. Almost all states have adopted some form of economic nexus that requires an out-of-state business to collect and remit sales tax. Economic nexus rules did not replace any of the physical presence rules that were previously in place.
These obligations potentially affect many industries, and may mean that a company does not have any physical presence but if their sales revenue and/or number of sales transactions exceeds a certain threshold over a one year period of time, then the state will assert sales tax nexus and require the business to collect the applicable sales tax.
These economic nexus standards are frequently changing and evolving and can be quite a pain to keep up with. See our economic nexus guide to see rules by state
A marketplace facilitator is a business or organization that contracts with third party businesses to sell goods and services on its platform and facilitates retail sales. Marketplace facilitators enable these sales by listing the products, taking the payments, collecting receipts, and in some cases assisting in shipment. Well-known examples include Amazon, eBay, and Etsy.
Laws governing marketplace facilitators popped up when states saw that platforms were charging sales tax on the sale of their own or certain third-party sales but not on all sales. This produced a gap in tax collection that revenue-hungry states quickly looked to close (and will probably be hungrier to close in the future as pandemic lock downs continue to wreck tax revenues). These laws are different in each state and should be monitored regularly.
Physical presence nexus means a business has a direct connection to a state; that connection allows the state or locality to levy sales tax on purchases from that business and imposes requirements to collect and remit taxes. Often physical presence itself – when a business operates out of a brick-and-mortar location in a tax jurisdiction, for instance – creates nexus.
Activities that can create a physical presence include:
Employees or offices in a state
Sales reps or agents visiting a state
Delivery vehicles, or maintenance or repair services in a state
Attending tradeshows in a new state
Inventory stored in a different state
Responsible Party Laws
Personal liability for sales tax can extend to owners, directors, shareholders, officers and even employees.
Responsible parties can also trickle down to the person whose duties involve managing and paying taxes or any other person who has the authority or ability to control business payments and decisions. This liability extends beyond the business to their personal assets, which could be claimed to satisfy a sales tax liability of the business.
A “responsible person” is liable for the sales and use tax owed, as is the business entity and any of its other responsible persons. But how do you determine exactly who in your organization is “responsible?” It may not be as simple as looking at the title of the individual.
Situs literally means position or site. For tax purposes, it is the jurisdiction (state, county and city) that has the legal authority to tax a transaction. For sales tax purposes, it is generally the jurisdiction in which a sale of tangible personal property or taxable services occurs. For use tax purposes, it is the jurisdiction in which tangible personal property or taxable services are used. Situs is easy to determine when the entire transaction occurs at the point-of-sale, but it is more difficult to determine situs when the transaction involves numerous sites, such as when the point-of-sale differs from the point of delivery or title transfer. Determining situs is particularly complicated for communications and internet-based sales transactions.
Tangible Personal Property (TPP)
Any property that is perceptible to the senses. In general, all tangible personal property is subject to sales tax unless the state specifically excludes it from tax. States also include many types of digital products as TPP even though they are not perceptible to the senses.
These are just some of the terms you need to be aware of when managing your compliance process. Download our Sales Tax Glossary to learn more. Have more questions on sales & use tax and how to maintain your compliance – reach out!