This is a guest post from Jennifer Dunn from TaxJar.
It sometimes seems that as a business owner, you have just too much to do. Besides the enormous responsibility of strategy development and business growth, there is a sea of tax related tasks to slog through. Not only do you have to pay your income taxes on time, you are also responsible for collecting taxes from your customers remitting this to the relevant authorities. Welcome to the world of sales tax!
The state needs funds for various public projects, and taxes are one key way for the state to earn revenue. So your state relies on you, as a merchant, to collect sales taxes from the customers you sell your goods to, and remit the same back to the proper authorities in a timely manner. For online sellers, this task can be especially complicated.
Enter Online Selling and Sales Tax
Now that more merchants are making a living selling online, and strategies like third party fulfilment are helping sellers earn even more than before, merchants may find themselves responsible for collecting sales tax from buyers in more than one state. And yes, the onus is on you to collect the sales tax from your customers wherever they are, and remit this tax back to the respective state authorities. Failure to do so can result in penalties. The big question that you are probably now asking yourself is in which states you need to collect sales tax? This varies, but for the most part, you are required to collect and remit sales tax in states where you have a sales tax nexus.
What is Sales Tax Nexus?
Sales tax nexus is the single most critical factor that determines whether you are liable to collect sales tax in a state where you are selling to customers. You have nexus in a particular state, if the state deems that you have ‘significant presence’ there, based on certain criteria. And if you do have nexus, you have to collect sales tax in that state.
If you have no nexus in a state and you sell there, you don’t have to collect sales tax. But here’s the catch. The rules defining nexus and what constitutes ‘significant presence’ vary from state to state. It could range from having a physical presence – a store, an office, a warehouse – to having a representative or affiliate on your behalf or having attended a trade event or conference there. Having an employee travel to another state to solicit business there is also likely to create nexus. Nexus rules vary from state to state, so it is best that you check whether your presence qualifies as ‘nexus’ in a particular state to avoid penalty. Either approach the state’s taxing authorities or talk to an experienced tax professional, who will be able to help you out.
How Sales Tax Nexus Impacts You
Now this is where it gets really interesting. As an online seller, if you have opted for a system, where the online platform holds the inventory for you (think Fulfillment by Amazon), you are deemed to have a sales nexus in all states where your online partner has a warehouse that stocks your inventory. So it is highly likely that you will have a sales tax nexus (besides your own state) in all states where your inventory is stocked, and also states, where you may have attended a conference and met some prospective customers and so on. Can you imagine the implication? With each state having its own sales tax rates, most levying additional local taxes, and declaring different filing periods, it can be mind boggling to keep track of all the sales tax you have to collect and remit. Where then will you get time for all that business strategy and development?
Turn to your ecommerce platform for help. Most ecommerce platforms are equipped to figure in the sales tax calculation rates. However, you have to feed in the right data into the system, about which states to collect the taxes from. Make sure you have the right information about your sales tax nexus in the different states that you sell in.
And once you have the system in place for collecting sales tax, don’t forget to file your returns on time.