The Official 2019 Tax Season may be over, but the discussions regarding Interstate Sales Tax isn’t and that brings to mind the sales tax nexus. If someone isn’t careful, this Sword of Damocles known as uncollected sales tax hanging over the heads of retailers and service providers may become a reality.
Nexus, also called “sufficient physical presence,” is a legal term that refers to the requirement for companies doing business in a state to collect and pay tax on sales in that state. For example, if you sell goods or services in Los Angeles, you must file and pay California state taxes.
Up to now, retailers that sell online across state lines are not necessarily responsible for collecting and reporting sales tax outside of their particular residing state. At this time there are a few examples where that isn’t accurate, however. A lot is happening that will turn the collection of sales tax on its head as the case of South Dakota v. Wayfair is working its way through the appeal process and supreme court reviews. Beware the Nexus.
You are responsible for collecting and remitting sales tax to a jurisdiction’s tax authority if you have established substantial presence in the state of delivery. This substantial presence is referred to as nexus. For more information on nexus, visit our What is Nexus? FAQ.
The threshold for this presence differs from state to state and a company’s presence in each state should be examined to determine if nexus has been established. A nexus study should be conducted to determine where a taxpayer has nexus and must register to collect and remit sales tax.
A company clearly has nexus if there is a business location or there are employees living in or working in the state/jurisdiction. But nexus can also be established if employees or agents travel into a state on a temporary basis to solicit sales or perform services. Even attending a trade show can create nexus. Storage of inventory at a third-party warehouse can also create nexus – particularly if you use a fulfillment agent to process your orders (e.g. Amazon FBA).
On June 21, 2018, the United States Supreme Court made its decision in South Dakota v. Wayfair, Inc. and overruled the traditional physical presence rule as a necessary requirement for nexus and collection requirements on a remote retailer. In states with economic nexus, such as South Dakota, exceeding a dollar sales or number of transactions threshold on sales into a state can create nexus without having physical presence. For more information about the Wayfair decision, read our news item. For frequently asked questions about the decision, including questions about collection, visit our Wayfair FAQ page.
Once you have established nexus in a state you are required to register as a retailer with the state before collecting and remitting sales tax for that state. Before a company starts collecting tax it must register with the Department of Revenue or Taxation in the state. Collecting tax without being registered is illegal as sales tax is a trust tax similar to payroll withholding.
(Source: Sales Tax Institute)
The issue of the sales tax nexus for retail goods sold via the internet is not necessarily a new topic. As of November of 2018, new wrinkles formed in the fabric of interstate retail sales, as individual states elected to implement state-specific regulations. If this action expands, it will become a tangled and twisted web (no pun intended) of laws and regulations, let alone an accounting nightmare for smaller retailers that ship goods across the country at will.
No one here is arguing that selling online doesn’t deserve the sales tax exemption most states now carry. Some manner of the once-proposed flat tax might help to solve the insolvency of some state tax coffers. They won’t cure their ills, but every new-found bit of tax revenue would not be overdoing it.
There is not too much of an argument between retailers and their local sales tax authority for in-state sales tax collection. Where the rub lies is with the resulting tax reporting nightmare that may ensue should an individual or small group legislation result in complicated reporting processes.
Thirty-one states now have laws requiring out-of-state retailers to collect sales tax, says Scott Peterson, a vice president at Avalara, a manufacturer of sales tax collection software. Some of the laws will go into effect in 2019. Five states have no sales tax: New Hampshire, Delaware, Montana, Oregon and Alaska, although some municipalities in Alaska do. The rest of the states have not yet passed laws. (Source: USAToday)
Current legislation states that retailers do not have to (nor do they attempt to) collect sales tax in a state where they hold no physical presence. That is a somewhat subjective term, as reflected in the case of South Dakota. They are attempting to structure their definition of a fixed dollar amount (in their case $100,000 per annum) or a fixed number of transactions per year. South Dakota floated the number 200, but that didn’t gain acceptance. But the fight is far from over.
North Dakota’s case of significance, Quill v. North Dakota established the water-mark of physical presence, but that is as much under attack by hungry states through crafting a variety of regulations that skate the issues of physical presence.
Somewhere down the road, and it is not expected to be too far into the future, sales taxes of some kind have will become a reality, as online sales continue to overtake physical store sales each holiday season, ultimately tipping the scales of commerce.
If your business has a nexus in your state, you are required first to register with your state taxing authority, and then begin to collect and report said taxes according to the appointed procedures.
In conclusion, we’re just glad that services are a lot farther down the list of “tax opportunities” on the dockets of taxing authorities, especially given the shiny object of legalizing recreational marijuana.
