In the early days of e-commerce, online retailers didn’t have to worry about collecting sales tax on the products they sold over the internet. Over time as consumers did more of their shopping online, many states experienced significant decreases in the amount of sales tax revenue they were able to collect. Eventually, states caught on and expanded their nexus laws to include online retailers so they could reestablish their reliable revenue source.
What Are Nexus Laws?
The term nexus is a legal tax term that defines when a business has a presence in a particular state that warrants paying or collecting taxes. In other words, nexus laws establish a state’s taxable jurisdiction.
The tricky part is that each state’s definition of nexus is different. To learn more about sales tax in your state, check out this blog post by TaxJar.
Who is Responsible for Collecting Sales Tax?
Ever since the 2018 case Wayfair Vs. South Dakota established an economic nexus for online retailers, any merchant of record that sells a product or service online that ships to residents in a state must collect that customer’s corresponding state’s sales tax. This also means that if you are selling your product via a third-party’s website (for example, Amazon), then you are not the merchant of record and you do not have to collect sales tax on the products/service you sell. The third-party site is responsible for collecting taxes.
Most US States have a remote seller threshold which means that until you hit this threshold for the state or states you have nexus in you do not have to pay sales tax. Some states have implemented a gross revenue threshold, others have a gross revenue and total transactions threshold. For example, in the state of Illinois, their remote seller threshold is either cumulative gross revenue of $100,000 from Illinois sales or more than 200 Illinois transactions.
There are 24 states that adhere to the Streamlined Sales and Use Tax Agreement (SST), which allows companies to easily, and cheaply, register in these 24 states with one form. It also allows for an easy flow of information on updates regarding sales tax rules and regulations. This does not mean you won’t need to register with other states as well, it just allows for easy registration and updates for those 24 states.
Where Do I Have Nexus?
Nexus laws do not mean that e-commerce retailers have to collect or pay sales tax for every state. Sales tax only has to be collected in the state or states your business operates—states where you “have nexus”.
You will have nexus in the state where your company headquarters is located. However, you can have nexus in other states as well if you have employees, a warehouse, or store inventory in another state. There is a grey area when it comes to remote employees or contractors in other states and whether this constitutes nexus in another state. Some states have seen cases that did not establish nexus in a new state if remote employees or consultants that do not interact with customers or engage in sales activities. However, if you have a remote employee or consultant in another state that interacts with customers or sales activities this would establish nexus in the majority of US states.
2020 Sales Tax Law Updates
It is important to stay up to date on sales tax laws, as many state’s laws are changing constantly. The biggest update to 2020 Sales Tax Laws is the implementation of marketplace facilitator nexus laws. Marketplace facilitator nexus laws have currently been adopted in 36 states, however, it is expected to grow in 2020.
So what does the addition of the marketplace facilitator mean for the companies selling through a marketplace? Generally speaking, this means that the marketplace (ex. Amazon) is responsible for collecting and paying the tax on sales made through their site. You will still be responsible for the sales tax on any sales through your own site.
How Do Subscriptions and Nexus Mix?
Due to the recurring nature of subscriptions and the fact that customers can often move (from one taxable jurisdiction to another one) during the span of their subscription, there are some important caveats to think through in order to ensure your business is properly complying with tax laws.
For example, if mid-subscription the customer changes his/her shipping address AND you bill monthly, then the sales tax should also change to match the nexus of the customer’s new shipping address. However, when a customer prepays up-front for a long-term subscription, then the sales tax is also collected upfront and paid in full to the customer’s shipping state at the time of the initial purchase.
Leverage Your E-commerce Platform
The good news is most e-commerce platforms such as Shopify and SalesForce offer sales tax integrations or features that automatically collect sales tax in accordance with your customers’ state laws. There are also softwares like Avalara and Vertex that integrate into any website and can help automatically calculate and collect sales tax.
Next Steps with Nexus
Once you’ve identified the states that you have nexus in, you will need to register for a sales tax permit in each of those states. If every state you have nexus is in part of SST, then you will only need to fill out one form for all of these states. From there you will need to either charge your customer the correct sales tax amount at checkout or decide that you’ll be paying sales tax out of your pocket. Finally, you will need to file sales tax returns, you’ll want to visit each stats website to ensure you are filing correctly.
Sales tax laws for online retailers are always evolving and changing, which means it is important to keep a close eye on each state you do business in and the thresholds for each state as your business grows.
Bulu offers turnkey solutions for specialty e-commerce and fulfillment including Financial Management and Merchant of Record services. If you’d like to have a conversation with a Bulu team member contact us.