Sales Tax Nexus: A Guide for Online Sellers
When you sell online, offering your products up on multiple channels is the smart move. But more channels can come with more problems, and one of those little administrative hassles is sales tax.
In this guide, we’ll explain how multi-channel sellers’ sales tax obligations can evolve and change, and give you some tips on how to conquer sales tax compliance as your business grows and thrives.
For a primer on sales tax filing, check out How to File Sales Tax: A Guide for Ecommerce Sellers.
What is Sales Tax Nexus?
Anybody who sells products needs to collect sales tax in states where they have sales tax nexus. “Nexus” is just a legalese way of saying that your business has a significant enough connection to a state that you should collect sales tax from buyers in that state. In a state’s mind, you—as the merchant—are using their roads and other infrastructure to run your business so you should be helping them out by collecting sales tax from your buyers and remitting it back to the state.
And let’s face it – since the Great Recession, states have been broke. And sales tax is the main form of revenue for many states. So it stands to reason that states want as many merchants as possible to have sales tax nexus and collect sales tax revenues for the state.
As a seller with a growing business, some of your common business activities may be creating nexus in a state without you even realizing it! Let’s dig in.
Common Factors that Create Sales Tax Nexus
Since sales tax is governed at the state level, each state can legislate what they consider to create sales tax nexus. Here are some of the factors that most states consider so create nexus:
Physical Location: Whether you sell products from a laptop on your kitchen table or from a downtown office or an industrial park warehouse, a location creates sales tax nexus. This is why you’ll always have home state nexus.
Personnel: An employee, contractor, salesperson or installer usually creates sales tax nexus. (Though there are some exceptions when it comes to contractors creating sales tax nexus.)
Inventory: Keeping a “stock of goods” in a warehouse in a state often creates sales tax nexus. This is the point where nexus can get tricky for people who sell through Fulfillment by Amazon or another third party program where inventory is stored around the country.
Affiliates: A third party affiliate who sends referrals to your store in exchange for a cut of the proceeds creates sales tax nexus in some states. This is one of the newer ways that states have found to create nexus.
Drop Shipping: If you have your distributors ship items directly to your customers, you’re in a drop shipping relationship. Depending on the terms of the relationship, you may be on the hook for sales tax.
Temporarily Doing Business: Every state is different, but in some states, attending a trade show, craft fair or otherwise doing business temporarily could make you liable for sales tax for the entire year. You can read more here about sales tax and temporarily doing business.
What to Do If You Have Sales Tax Nexus
As you can see from the list above, many of the factors that create sales tax nexus are the same business activities that will help your multi-channel ecommerce business grow and thrive.
Here’s what you’ll need to do if you find that you have sales tax nexus in a state other than your home state.
Register for a Sales Tax Permit in that State
Head over the state’s department of revenue (or other taxing authority) website and register for a sales tax permit. Keep in mind that, in the case of a seller based out of state, you may be asked to register for a “use tax” permit instead.
In most cases, unless you do have a physical location in the remote state, you should use your business’s main address when registering for a sales tax permit. Sometimes that state’s online sales tax registration system won’t let you complete the application with an out-of-state address. In this case, you can generally give the state’s taxing authority a call and have them override it. In other cases, they may ask you to complete a paper registration instead.
Collect Sales Tax from Buyers in that State
Once you have nexus in a state, be sure to collect sales tax from all buyers in that state. It’s especially important for multi-channel sellers to be sure to set up all channels to collect sales tax.
It’s easy to go wrong at this stage in your multi-channel business.
For example, say you sell your awesome wireless headphones out of your retail store in California, and through your Magento store online. Then you decide to expand to another channel with Fulfillment by Amazon (FBA). With FBA, you may end up with inventory stored in some or all of the states with Amazon fulfillment centers. This likely creates inventory nexus for your business in new states. Not only would you need to set up your FBA account to collect sales tax in all the states where you have nexus, you’d also need to set up your Magento-powered store to collect sales tax from buyers in all the states where you have nexus.
If you sell multi-channel and worry that you aren’t collecting the right amount of sales tax, TaxJar’s “Expected Sales Tax Due” report can help you pinpoint the problem and ensure you’re collecting the correct amount of sales tax from all the right customers.
Double Check that You’re Collecting the Correct Sales Tax Rate
Most of the time, if you are collecting sales tax in a state but your business isn’t based there, then you’ll collect based on destination-based sourcing. What does that mean?
Long story short, some states require in-state sellers to collect sales tax based on the rate of their business location. On the other hand, a majority of states are “destination-based,” meaning they require merchants to collect sales tax based on the buyer’s ship-to location. For the most part, if you have sales tax nexus in a state but are not based in that state, then you should collect sales tax based on the sales tax rate at your buyer’s ship-to location.
Check out this blog post to learn a lot more about origin-based and destination-based sales tax collection.
File Sales Tax Returns in Your Nexus State(s)
When you register for your sales (or use) tax permit in the new state, you’ll be assigned a filing frequency. Keep in mind that every state is different. While you may be accustomed to having a sales tax filing due every month on the last day of the month in California, you may find that South Carolina only wants to hear from you every quarter on the 20th of the month. Be sure to set reminders for yourself to pay sales tax to the right states on the right sales tax due dates!
What To Do When You No Longer Have Nexus in a State
Sometimes your business decisions – such as letting an employee go or moving your headquarters – will mean that you no longer have sales tax nexus in a particular state. If this should occur, you should first notify the state. As per usual with sales tax, every state is a little different, but you can start by giving their state taxing authority a call. (Here’s a handy list of the best way to talk to a person about sales tax in every state.)
From there, some states may require a written notice while others will just want you to check a box to the affect of “this is my final filing” on your last sales tax return.
You should also be aware of the concept of “trailing nexus.” Some states consider you to have nexus for a period of time even after you’ve stopped your nexus-creating activity in the state. Their reasoning is that some business activities (such as having a salesman do demonstrations in the state) may create sales for you even after you’ve ceased activity in the state. Trailing nexus can be a bit of a fuzzy concept, and it’s another reason why you should contact the state’s taxing authority before you stop collecting sales tax from buyers in that state.
Check out this post for a lot more about what to do when you no longer have sales tax nexus.
How to Automate Sales Tax Reporting and Filing
As your business grows, the actual process of reporting how much sales tax you’ve collected and filing sales tax also grows more complex. Calculating how much sales tax you collect from sellers in multiple states and on multiple channels can involve pulling and combining data from different reports. To make matters worse, the vast majority of states rely on you, the seller, to divide up how much you’ve collected by state, county, city and other special taxing jurisdiction.
Depending on your needs, the act of overseeing sales tax collection and filing might not be too much of a hassle. But if you find that your sales tax collection needs are robust, or if they’re simply costing you too much time and stress, consider using TaxJar or another online solution to automate the process.
Watching your business scale is a beautiful thing. But just remember that a bigger business involves a bigger pile of administrative tasks to deal with. We hope this guide has helped you put a lid on sales tax so you can get back to focusing on the important aspects of your ecommerce business.
This is a guest post by Mark Faggiano, CEO and Founder of TaxJar. TaxJar is a service built to make sales tax simple for ecommerce sellers. Start your 30-day-free trial of TaxJar today, and eliminate sales tax compliance headaches from your life.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.