Online retailers face a lot of challenges today. Sales tax obligations are among them.
It’s been four years since these obligations began landing on businesses’ plates nationwide, and the situation isn’t getting any easier. Only now are federal lawmakers beginning to wonder if the current sales tax landscape overburdens online businesses. In the meantime, your business may have to start collecting and remitting states’ sales tax – with severe penalties if you don’t.
What do you need to know?
The back story
In 2018, the U.S. Supreme Court decided in South Dakota v. Wayfair, Inc. et al. that an out-of-state seller could establish “nexus” through economic activity in tax jurisdictions. In short, the Court decreed that physical presence alone in the internet age is no longer the only way to create nexus.
The provisions of Wayfair allowed South Dakota to compel businesses with at least $100,000 in gross revenue sourced to the state of South Dakota to collect the applicable sales tax. The state also imposed a 200-transaction threshold on out-of-state sales. States quickly followed suit, setting individual economic nexus triggers based on in-state revenue or the number of transactions. States’ individual thresholds varied from the start, and still do.
(Physical nexus has also been around for a long time, by the way. You can create it in a state by having a store or office space there – or often simply by having sales or service reps do business in the state.)
What’s taxable?
In addition to tracking when you create nexus in a state, understanding the taxability of your company’s products or services is one of the first steps to complying with sales and use tax laws nationwide.
That can be a challenge: Keeping up with states’ sales tax rules was a major worry for 2022 among respondents to our recent survey regarding sales tax and business growth, as was understanding taxability of products and services.
Taxability, like nexus, can differ across state lines. If you sell items considered tangible personal property (e.g., physical items), things are a bit easier, as they’re likely taxable for sales and use tax purposes. Similarly, services are generally exempt unless stated otherwise, though this could change in the future in many states.
Other products and solutions can be more complicated. Many states’ rules don’t address how some digital products are taxed, for instance. Over the last few years many states, their eyes on potentially huge sources of tax revenue, started taxing technology, digital goods, software and Software- as-a-Service (SaaS). Telecommunications companies must consider many taxes and fees that other industries do not. Construction, manufacturing, leasing businesses … the list goes on.
Understanding your own state’s rules is usually simple, but as your business grows, so does your sales tax obligation. To stay compliant, you need to watch both nexus and taxability rules in each state: There are times where you establish nexus but your product and/or service is not taxable in one state but is in others.
(In our next blog, we’ll drill down into how some states pinpoint nexus, other factors that can create economic nexus, and discuss what you can do to protect yourself regarding your obligations.)
TaxConnex provides sales tax consulting and compliance assistance to ensure you are making the right choices when it comes to managing your on-going compliance. Get in touch to learn about our white-glove service offerings.