Fair warning: this article is probably not going to answer state specific sales tax questions you have! My purpose is to alert you to when you may have sales and use tax issues to consider for your business. States vary widely in their sales and use tax requirements, so it is necessary to delve deeply into the specifics of any state in which you are transacting. States have also become very aggressive in the collection of revenue, including sales and use tax. This issue has become more prevalent with the 2018 Supreme Court ruling, "South Dakota v Wayfair". Larger businesses generally have experts on staff in this area, but I find that small businesses are the most likely to be completely unaware of their requirements relative to sales and use tax. Use tax is also a consideration for individuals who live in states with a sales tax, but we will confine ourselves to considering use tax as it relates to businesses. This discussion will provide you with some background and general information which will help you identify states you transact in that warrant closer inspection.
Most people are familiar with sales tax. It is generally collected on goods sold, not services, at the time of sale, and it is remitted on some regular basis to the state taxing authority. Use tax is less commonly known, but it is the mirror image of sales tax. In states with a sales tax, if you purchase goods online or out of state, and you are not charged sales tax, then you are generally required to pay use tax to your state. The use tax is the amount of tax you would have paid your state if you had purchased those goods in the state.
You are generally required to collect sales tax in states where you have nexus. Nexus is generally established in one of three ways: you have a physical presence in the state (e.g., an office, a warehouse, a storage facility), you have an employee in the state (including part time or temporary, for any period of time), or you have an agent in the state (e.g., a contractor paid on commission only, a marketing representative, or a related business entity). Let us take the example of Business A located in State X that ships goods to a customer in State Y, which has a sales tax. If Business A has a storage building in State Y, nexus is established, and Business A should register in State Y, collect sales tax on orders shipped to State Y, and remit the sales tax to State Y according the requirements in State Y. If Business A has a remote employee who works from home in State Y, nexus is similarly established, and the same rules apply. If Business A has a subcontractor, who is not an employee, who does marketing and sales for it in State Y, nexus is established, and the same rules apply. If Business A does not have any physical presence, any employees of any kind, and no agents of any kind, then Business A generally does not have nexus in State Y and is not required to collect and remit sales tax on shipments into State Y, as long as the product is shipped via common carriers such as UPS, Federal Express or the US Postal Service. This rule changed somewhat as a result of the "South Dakota v Wayfair" decision and now states can impose thresholds of minimum transactions or dollar sale thresholds in their state to establish nexus even if there is no physical presence. These thresholds vary widely from state to state.
With the advent of so much online sales activity, some states have enacted “click through nexus” laws. Under click through nexus, a business with no traditional nexus in a state may establish nexus by having direct links to its website on another business website that does have nexus in that particular state. Going back to our example of Business A located in State X and shipping to State Y, which has a sales tax, let’s assume that there is no traditional nexus in State Y (no physical presence, no employees, and no agents). However, Business B, which is located in State Y, has a link on its website to Business A’s website. Business A now has click through nexus in State Y and may need to collect, remit, and file sales tax in accordance with State Y requirements. Not all states subscribe to click through nexus, but the nexus rules for all states are different and constantly changing. In addition to considering any state you may have traditional nexus in, consider any business partners you have in other states who might trigger click through nexus for you by including a link to your business on their website.
A common exception to note is the reseller exception. As a customer in a state that has sales tax, you should not be charged for sales tax if you are reselling the product. However, you have to file a reseller certificate with the vendor to be exempt from sales tax. Back to our example, if Business A has nexus in State Y, they should generally collect sales tax on sales of goods shipped to State Y. However, if a customer in State Y files a reseller certificate with Business A, then Business A should keep the reseller certificate on file and not collect sales tax from that customer.
Use tax should be remitted when the business purchases goods online or out of state and is not charged sales tax but would have been charged sales tax if the purchases had been made in the home state. Going back to our example, let us assume that State X has a sales tax. Business A purchases an item online from a company that does not have nexus in State X so no sales tax is charged. If sales tax would have been charged had it been bought in State X, then Business A should remit the tax that would have been charged as use tax. Oftentimes, use tax is remitted on the same tax form as sales tax.
In summary, consider carefully all states you transact in. If they have a sales tax, familiarize yourself with their definition of nexus and comply with the sales tax collection and remittance requirements. If you operate in a state with a sales tax, track your purchases for possible use tax requirements. State sales and use tax audits are on the rise. They are expensive and take up valuable employee time. There are companies that specialize in assessing sales and use tax requirements if your situation is complicated or you just prefer to have an expert evaluation. And as always, your trusted accounting professional is a good place to start if you have questions.
Post originally written by Nora Tellifson, CPA in May 2017, with minor updates added in May 2019.
You are generally required to collect sales tax in states where you have nexus. Nexus is generally established in one of three ways: you have a physical presence in the state (e.g., an office, a warehouse, a storage facility), you have an employee in the state (including part time or temporary, for any period of time), or you have an agent in the state (e.g., a contractor paid on commission only, a marketing representative, or a related business entity). Let us take the example of Business A located in State X that ships goods to a customer in State Y, which has a sales tax. If Business A has a storage building in State Y, nexus is established, and Business A should register in State Y, collect sales tax on orders shipped to State Y, and remit the sales tax to State Y according the requirements in State Y. If Business A has a remote employee who works from home in State Y, nexus is similarly established, and the same rules apply. If Business A has a subcontractor, who is not an employee, who does marketing and sales for it in State Y, nexus is established, and the same rules apply. If Business A does not have any physical presence, any employees of any kind, and no agents of any kind, then Business A generally does not have nexus in State Y and is not required to collect and remit sales tax on shipments into State Y, as long as the product is shipped via common carriers such as UPS, Federal Express or the US Postal Service. This rule changed somewhat as a result of the "South Dakota v Wayfair" decision and now states can impose thresholds of minimum transactions or dollar sale thresholds in their state to establish nexus even if there is no physical presence. These thresholds vary widely from state to state.
With the advent of so much online sales activity, some states have enacted “click through nexus” laws. Under click through nexus, a business with no traditional nexus in a state may establish nexus by having direct links to its website on another business website that does have nexus in that particular state. Going back to our example of Business A located in State X and shipping to State Y, which has a sales tax, let’s assume that there is no traditional nexus in State Y (no physical presence, no employees, and no agents). However, Business B, which is located in State Y, has a link on its website to Business A’s website. Business A now has click through nexus in State Y and may need to collect, remit, and file sales tax in accordance with State Y requirements. Not all states subscribe to click through nexus, but the nexus rules for all states are different and constantly changing. In addition to considering any state you may have traditional nexus in, consider any business partners you have in other states who might trigger click through nexus for you by including a link to your business on their website.
A common exception to note is the reseller exception. As a customer in a state that has sales tax, you should not be charged for sales tax if you are reselling the product. However, you have to file a reseller certificate with the vendor to be exempt from sales tax. Back to our example, if Business A has nexus in State Y, they should generally collect sales tax on sales of goods shipped to State Y. However, if a customer in State Y files a reseller certificate with Business A, then Business A should keep the reseller certificate on file and not collect sales tax from that customer.
Use tax should be remitted when the business purchases goods online or out of state and is not charged sales tax but would have been charged sales tax if the purchases had been made in the home state. Going back to our example, let us assume that State X has a sales tax. Business A purchases an item online from a company that does not have nexus in State X so no sales tax is charged. If sales tax would have been charged had it been bought in State X, then Business A should remit the tax that would have been charged as use tax. Oftentimes, use tax is remitted on the same tax form as sales tax.
In summary, consider carefully all states you transact in. If they have a sales tax, familiarize yourself with their definition of nexus and comply with the sales tax collection and remittance requirements. If you operate in a state with a sales tax, track your purchases for possible use tax requirements. State sales and use tax audits are on the rise. They are expensive and take up valuable employee time. There are companies that specialize in assessing sales and use tax requirements if your situation is complicated or you just prefer to have an expert evaluation. And as always, your trusted accounting professional is a good place to start if you have questions.
Post originally written by Nora Tellifson, CPA in May 2017, with minor updates added in May 2019.
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