Do you have to collect sales tax on goods and services in other states? The first question you’ll need to consider is whether the things you’re selling are taxable in the jurisdictions where you’re selling them.
You may need a taxability study to make sure. If the items are not taxable, you definitely will not need to collect sales tax.
If you’ve determined that your products and services are taxable, the next question is whether you have nexus in the jurisdiction where you’re selling the items.”Nexus” literally means a connection, and in the context of sales tax it means a connection between the company making a sale and the state where the sale is being made. The state can only require a company to collect and remit sales tax if there is a strong connection between the company and the state.
Until last month, an alternate term for nexus was “sufficient physical presence.”Just sending a catalog into a state or making a sales call by phone was not considered sufficient physical presence to require sales tax collection. Having a warehouse or a sales force or even attending trade shows would create nexus. Other potential physical connections like having affiliate marketers in a state or drop shipping to a state could be defined by individual states as creating nexus.
Quill, Wayfair, and Nexus
One of the most important court cases on the subject was North Dakota vs. Quill. In this case, North Dakota wanted Quill, an office supply company, to collect and remit sales tax. The Supreme Court sided with Quill in this case, saying that mail orders didn’t create a sufficient physical presence.
A new case, South Dakota vs. Wayfair, was recently decided by the Supreme Court. In a 5-4 decision, SCOTUS overturned Quill, saying that the rise of e-commerce has changed the circumstances. Wayfair.com, a website with over three million pages of products and decorating ideas, shows up in the living rooms and on the phones of people in South Dakota every day. Arguably, that website creates more of a presence in the state than a warehouse would. The Supreme Court decided that it did.
Rather than a physical presence, South Dakota claimed that Wayfair had an economic nexus. They were taking advantage, South Dakota said, of the economy of South Dakota, and they should have to do their part by collecting sales tax. The Supreme Court didn’t settle the question of how a state could define nexus. It’s up to the states to do so. The Supreme Court just made it clear that physical presence isn’t the litmus test anymore. States can now write laws demanding that online sellers pay sales tax without establishing a sufficient physical presence. Virtual presence can be part of the equation.
State definitions of nexus
As of this writing, 21 states have come up with laws requiring online sellers to collect sales tax. Most states have set limits designed to spare the smallest e-commerce shops from the complexity of registering and filing sales tax. However, with a number of states setting that limit as low as $10,000 in sales per year in their state, businesses will have to be very small to slip in under those definitions.
Vermont, for example, has “Click Through Nexus” for online sellers with no physical presence in the state, but with “agreements with residents.” The law says that “a remote vendor will be presumed to have Vermont
nexus for purposes of collecting sales tax if it has agreements with residents to refer customers that led to sales in excess of $10,000 in the previous year.” When the law was written, this might have applied primarily to affiliate marketing, but the language is open enough that Vermont could use the Wayfair decision to extend its application. That means that any online seller who sold $10,000 worth of taxable goods or services in Vermont in 2017 would need to apply for a Vermont business license, register to collect sales tax, and remit sales tax in quarterly payments for 2018. Anyone who hasn’t been collecting sales tax so far in 2018 could be in an uncomfortable position.
Washington State doesn’t require sales tax compliance until 30 days after a seller has hit its $10,000 annual threshold. However, any seller who doesn’t have to pay sales tax is required to alert their customers to the amount of sales tax they would have paid, which the consumer will be responsible to pay as use tax. This process could end up being as costly as sales tax compliance. Washington has a definition of economic nexus that is based not just on sales, but also on the percentage of business interests including receipts, payroll, and property.
With 50 different states and thousands of different tax jurisdictions, there will be many possible definitions of nexus.
This isn’t over
Several states are already involved in litigation over their new online sales tax laws. Congress could still jump in with a new version of the Marketplace Fairness Act. And of course, many states haven’t yet made any moves.
One sure thing is that it’s no longer as simple to determine nexus as it used to be. Another is that there will certainly be changes in the upcoming months and years. A sales tax calculation and filing solution that stays up to date automatically is a must for nearly any business that sells across state lines. Let us show you how Sales Tax DataLINK can help.