Understanding economic and physical nexus and the taxability of your products and services goes a long way to ensuring your sales tax compliance. But nothing’s that simple with sales tax. 

Here’s a look at a few other things you should keep in mind – including how to avoid hefty penalties.

Off to marketplace 

Economic nexus requires remote sellers to collect sales tax because they hit certain thresholds of revenue or sales in states. All states with a sales tax have established economic nexus standards. 

Most states set their own parameters – and one of those parameters can involve including sales of items exempt from sales tax. In looking at whether you have reached any of the economic nexus thresholds, most states will consider total gross sales which includes any non-taxable sales as well as exempt sales. 

Many states will also consider whether sales via a marketplace facilitator like Amazon, Etsy or eBay contribute to the economic nexus thresholds. 

This becomes important when a state has both marketplace facilitator laws and economic nexus laws.  

Generally, a marketplace facilitator is a business or organization that contracts with third parties 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.

Destination and origin rules 
Sales tax is usually calculated by the destination. In other words, if you’re selling to a customer in Maine and you’ve established that you have economic or physical nexus in that state, you must collect and remit Maine sales tax from that customer.  

Most states and Washington, D.C., are destination-based, requiring you to apply sales tax at the location of the customer. Variations can exist based on what you’re selling, in most situations, following the destination-based sourcing rules for interstate commerce is a safe bet. 

We said “most”: Some states are origin-based. Major ones include Texas, Pennsylvania, Ohio, Virginia and California. (California is a “hybrid-origin” state that applies certain state and local taxes based on the origin of a transaction, but the state also applies certain district level sales taxes based on the destination.) 

Ensure you know which states they are and that you will have to manage them differently than the rest. And be sure to check frequently – rules change fast.

Additional considerations 

Here are some other wrinkles to consider as you do business in different states: 

Misreading your nexus footprint. Besides the economic thresholds in each state, be aware that contractors and other third-party resources performing services on your behalf can also create a physical presence. Inventory stored in warehouses is another consideration, including consigned inventory stored in Amazon warehouses. 

Situsing complexities. For tax purposes, situs is the jurisdiction with legal authority to tax a transaction. For sales tax purposes, it is generally the jurisdiction in which a sale of TPP or taxable services occurs. For use tax purposes, it is the jurisdiction in which tangible personal property or taxable services are used.  

Drop shipments.  Many purchases made online today are drop-shipped to consumers and typically involve multiple states and parties. A thorough knowledge of which exemption certificates are necessary based on the ship-to location of your customer can also help prevent you from an unnecessary tax burden. 

Lack of exemption documentation. Taking your customers’ word that they are exempt will not help you during an audit.  It’s good practice to receive and review these exemption certificates before you decide to not charge sales tax.  

If you think you may be making any of these mistakes, examine your sales tax processes and rectify them. There’s no statute of limitations for an unregistered tax payer, meaning that unpaid tax liabilities for non-filing years can be audited indefinitely – and penalties associated can start at 25% of tax liabilities.

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.

TaxConnex

Written by TaxConnex

No matter how many states you're in or how often regulations change. It’s only possible because of our proprietary platform and network of sales tax experts. Sales tax is more complicated than ever, especially in a post-Wayfair world. Yet the providers who claim to simplify sales tax often still leave the hardest parts – and the liability – up to you. When you work with TaxConnex, it’s all on us. This means you get all the know-how, all the backup, and none of the risk. That’s why everyone from big corporations and accounting firms to the latest online boutique all turn to TaxConnex. Now it’s all on us.™