These are exciting times for online sellers. There is tons of opportunity everywhere, but with opportunities come challenges. In reality, online sellers face a very difficult environment. Competition is fierce and change is constant. Just staying on top of the ever changing technology and platforms is a challenge, not to mention keeping up with pricing pressure from competitors and marketing is a whole other can of worms. How do you drive customers to your website and keep them coming back?
And then on top of all that, there’s the issue of sales tax. It can be daunting and confusing. And it’s not like taxes help your business be successful. Quite the opposite, actually. If you fail to stay on top of the sales tax issues, it can cause your business to fail. You may do everything (all the hard things, like marketing, merchandising, fulfillment) just right, but if you mess up the sales tax thing, it could kill your business. But, have no fear, we are here to make sales tax the least of your concerns.
Here are the Top 5 questions we get from online sellers:
1. Do I Really Have Nexus??
First, what’s nexus and why do I care? A good definition of nexus is, the link or connection you must have, before a state can require you to collect or pay its taxes. For sales tax purposes this link must have a physical component. However, you may be surprised at what the states and in some cases the United States Supreme Court, consider to be physical presence.
What if you use Fulfillment by Amazon — Does a little inventory in another state really give you nexus? The answer is yes. See below.
It is important to note that there is no national rule, but rather each state has statutes, rules, regulations or guidance as to what creates nexus in their state. There are many activities which the states all agree create nexus and many where the states have differing opinions. For the purposes of this article, we can not possibly address all the activities in all of the states. However, we have a number of great webinars , white papers and charts that go into detail about nexus, important court cases involving nexus and numerous activities that states consider to be nexus creating. We have a list of the Top 10 nexus creating activities here.
For online sellers, and especially for Amazon FBA sellers, the activity that usually creates the most nexus problems is having inventory in a state. When you ship your inventory to Amazon, you may be shipping your product to Amazon in one state, but Amazon generally has a clause in their agreements where they can move your inventory to any of their warehouses. Since Amazon currently has warehouses in 16 states from where they ship, your inventory could actually be in 16 different states. This means you could actually have nexus in all 16 of those states. The good news is that two of those states, NH and DE do not have a sales tax, so we are actually looking at potentially 14 states for sales tax nexus.
One state that many FBA sellers forget about is their home state. You probably know already that that having employees in a state is a nexus creating activity. Well that includes you! So if you live in a state where there is not an Amazon warehouse currently, you could be looking at having nexus in potentially 15 states. If you need help figuring out where you have nexus we can help you work through it.
2. Ok, if I have nexus, As a practical matter, at what point do I start collecting tax?
Just because you have nexus in a state, doesn’t mean you should just panic. You should be concerned, but do some analysis of your situation to determine if and when you should start collecting the tax from your customer. Based mostly on the volume of sales you make in a given state, it may not be worth it to collect the minimal taxes in that state. This is entirely possible in some states where you sell. On the other hand, when you consider all the costs of not collecting the tax, you may find that it’s actually cheaper to start now. Here are some items to consider:
3. I Have Nexus. It’s Material. How Do I Get Registered?
Great question! It’s actually fairly easy to get registered to collect sales tax in a state. It’s just tedious and time consuming. You can use option one below if you have the time and patience to do it yourself, or option two if you want to hire someone like us to do it for you.
4. Which Taxes do I Collect and at What Rate (just the State rate or do I need to collect the local taxes too)?
This is a common question. In many states, if you just Google “what is the sales tax rate for X state?” The answer you get sometimes is just the state portion of the total. For example the state rate in Texas is 6.25%. But if that’s all you charged in Texas, you’d be on the hook for up to 2% local tax on everything you sell. Other states just have one single rate in the whole state or at least most of the state. Some states administer both the local and state taxes at the state level. Other states allow local cities and/or counties to administer the local taxes. Generally speaking, if you charge any tax at all, and you are shipping to another state, you charge the full state and local tax rate based on the “ship-to” location. If you are shipping from a location inside a state to another location in that state, you may have an obligation to charge tax based on the “ship-from” location. Here’s a link to a great tool for determining the rate at a particular location.
5. How do I Get the Money to the State?
So many online sellers seem to get stuck here, or they’re making some invalid assumptions. It seems like many online sellers seem to think that somehow someone else is paying the tax over to the state governments. Amazon FBA is a really great service. Unfortunately, they end up creating nexus for online sellers who have inventory in all of the states, but once you configure the seller’s dashboard and indicate what states you want to collect tax in, then it’s pretty automatic. Amazon starts adding tax to all shipments to those states. Easy. But don’t assume that Amazon sends those taxes to the states. They don’t. They actually send it to you and it’s up to you to remit it.
You remit it by filling out the appropriate forms each month or each quarter or even annually, and then sending in the indicated tax on that form. Easy, in theory. As a practical matter it’s quite the bother. Still, if you have the time and inclination, it’s something you can do on your own. If not, we suggest you talk to us about how we can take over that process for you and shockingly low prices.
Those are the top 5 questions we seem to get from online sellers. The bottom line is that it’s much easier and ultimately much more cost-effective to get your systems set up to collect and remit the tax early on than it is to wait to be audited by a state. With the proper assistance, it can be relatively painless to take care of sales tax. Then it’s up to you to make all the other business aspects work. And we’re rooting for you!
In their pursuit of this Internet treasure the states are taking a number of different approaches. The states easiest to follow are those that have passed new statutes. There are currently 3 of these states that have passed “Amazon Laws”; NY, NC and RI. One of the major components of all three of these statues is what is called “Click-Through Nexus”. This nexus occurs when the seller enters into an agreement with an in-state resident, where the resident is compensated for referring customers directly or indirectly to the seller. One form of this is an affiliate program where a potential customer clicks on a resident’s link and is redirected to the seller’s website. The laws are currently being challenged in court and many tax professionals have taken a wait-and-see approach.
While the professionals may be waiting, the states are not. According to BNA’s 2010 Survey of State Tax Departments, 14 additional states believe that their existing statutes allow them to pursue taxes through this “click-through nexus”. The approach of these states is much more stealthy and without the information contained in the BNA survey, many would be hearing about this the first time through an audit. The states referenced in the BNA survey are: Arizona, the District of Columbia, Florida, Iowa, Maryland, Missouri, Nevada, New Mexico, North Dakota, Pennsylvania, South Dakota, Tennessee, Texas, and Washington.
In addition to “Click-Through Nexus” many of the states are looking at (or have already passed in the case of Colorado & Oklahoma) “Sales & Use Tax Notice and Reporting Requirements” for transactions where sales taxes are not collected. Quite simply states are requiring sellers without nexus to inform purchasers that tax is due on individual transactions as well as provide year end summaries with instructions on how the taxes should be paid. There are also requirements for reporting these sales to the state and provisions for penalties for non-compliant sellers.
If the new statutes were not enough, states are aggressively searching for companies that have “old-fashioned nexus”. This nexus is caused by the usual myriad of ever-evolving activities whose importance in creating nexus can vary from state to state. Most of these activities are not directly related to the Internet and are conducted by other parts of your company, but could impact the sales tax aspect of your Internet business anyway. These activities are too many to list entirely but here is a quick list of 10 potential nexus-creating activities:
Let’s not forget those issues that are not nexus related. Issues like changing taxability (software especially), delivery methods (downloads vs hard copy) and of course drop-shipping issues. Are you responsible for the taxes on a sale someone else makes? You could be. If your purchaser is not registered in a state and you have nexus in that state you may be liable.
If you are beginning to wonder if you need to take another look at how you are approaching these issues pat yourself on the back. All too often we speak to very smart people at companies of all sizes and types, who work at all levels of the organization that we believe are much too complacent. They assume that if their system has worked up to this point why change it? Some of them are right. They stay on top of the ever-changing environment and update their policies continuously. Others find out the hard way (usually in a Sales/Use Tax Audit), that just because it worked in the past doesn’t mean it’s going to work now.
“The greatest tragedy when it comes to sales tax is neglecting to collect sales tax on a taxable item at the point of sale, only to have it come out of your pocket later.” Because unlike an income tax which comes out of your pocket no matter when you realize it, sales tax that would have been paid willingly (if not grudgingly) by your customer at the time of the sale, ends up coming out of your pocket 3 to 5 years later. And, don’t forget to add the penalty and interest insult to the injury. Can you afford not to be compliant?
Ok you’ve started to wonder, now what do you do. Here are some suggested actions:
There are currently so many issues effecting Internet sales it is hard to cover them all or in great detail in a single article like this. It is our intention to alert you to as many of these issues as we could. If you have any questions or would like additional information please let us know.
The Empires Strike Back — Big Developments in Colorado and California
Amazon.com has long been a target of the state government empire. In fact, the Empire State started it all. We’ve mentioned before that New York has been on the forefront of the nexus wars. They were the first to float the idea that Amazon, by virtue of their “affiliate” relationships in NY has nexus in NY.
Never mind that the term affiliate as it relates to Internet relationships is not nearly the relationship contemplated in the more traditional usage of that term. The dictionary.com definition of the term “affiliate” as used in commerce is “a business concern owned or controlled in whole or in part by another concern”. In common Internet usage, to be an “affiliate” of a website is no such thing. I can be “affiliated” with Amazon.com by merely signing up to be one. I agree not to do certain things that would harm Amazon, but I certainly am not owned nor controlled by them nor do I represent them, and certainly I do not have any authority to bind them to an agreement with another party. Just because I’m called an affiliate, doesn’t, in and of itself, mean that now Amazon.com has nexus wherever I live. But that’s what New York is saying. And how all this turns out is something we have been observing with some interest.
Taxation Without Representation
When one state seems to be having some success in either targeting certain types of taxpayers or certain industries or employing certain techniques or novel approaches to taxation, other states jump on the bandwagon. We see this happening in this case also. In fact, in the publications we subscribe to, it’s not at all uncommon to actually see headlines like “X State Legislature Passes ‘So-Called Amazon Provision’ Into Law”. This trend of states getting ever more aggressive is on the upswing.
Virginia is the just the latest example of this. A bill just passed the VA Senate that provides a presumption of nexus exists in a situation where a seller enters into an agreement with a VA resident in which the resident “refers potential customers” to the seller “by a link on an Internet site”.
What states really like is taxation without representation. It’s almost impossible, and probably political suicide, in the current environment to suggest raising taxes. But revenue shortfalls and corresponding budget deficits abound. To cut spending might seem to be the logical choice, but that’s also politically difficult. Who wants to be accused of trying to “balance the budget on the backs of the poor”? So what is there to do? Certainly, a state can send out more auditors and train them to be more aggressive. That is definitely happening, but even that comes at a cost. If you harass your own taxpayers too much, they begin to want to vote in some different people.
What if you could tax people who can’t vote you out? This is exactly what is at the root of all this. Get money from companies who can’t vote you out of office. They’re not citizens with a vote. Plus the states can pursue them with a certain righteous indignation. It’s not that they’re looking for revenues only, they’ll say, but really it’s all about “leveling the playing field” for local citizens and businesses. The playing field is not level, if the Amazon’s of the world have a built-in advantage of not having to charge sales tax.
Tear Down This Wall!
If it were up to the States, they would exempt their own citizens from paying any tax and impose their entire budgetary requirements on non-citizens. If you want to business in our state and “exploit” our resources and services, then you’re going to have to pay! But fortunately for the prosperity of our nation in general and particularly for companies trying to do business in more than one state, there is this clause (Article I, Section 8, Clause 3) in the Constitution that reserves the right to the US Congress to “Regulate Commerce … among the several States…” This is commonly referred to as the “Interstate Commerce Clause” and is widely interpreted to mean that states can’t burden interstate commerce with discriminatory taxation.
Suffice it to say that there is a continuing tension between “leveling the playing field” on the one hand and “taxation without representation” on the other. Man has stepped foot on the Moon and the Wall has come down in Berlin, and so maybe this issue will be resolved, but peace may come to middle east first.
The bottom line is that faced with revenue shortfalls and the resultant budget deficits, state revenue departments and state legislatures are scrambling. They are now and will continue to push the envelope on asserting that non-citizens have nexus in their state. Once they win the nexus battle, then they can force companies to collect and pay their taxes.
Here’s a Few Other Recent Developments in California and Colorado
COLORADO: An interesting bill has passed the Colorado House and the CO Senate (with significant amendments to be resolved). The amended Senate version would create nexus for a retailer who is part of a controlled corporate group with a component member who has a retail presence in Colorado. This is not all that revolutionary. Affiliate nexus (as that term is more commonly understood in the state taxation parlance and not in the NY definition) is not a new approach. But here is the interesting part. Any retailer who has nexus as a result of being part of a such a controlled group, would now have (if this bill is signed into law) some new notification and filing responsibilities. First, the seller would have to notify their customers that sales tax is due on those purchases. What if they don’t? They would be subject to a $5 penalty for EACH failure. That’s big. Second, the seller who does not collect tax, but has nexus through this attribution approach, would also have to send a separate mailing (by first class mail) to each of its customers in CO a schedule showing the detailed purchases they made. This mailing would have to be done by January 31 of the year following. That’s huge.
But wait, there’s more!
Third, and here’s where this is really big, this retailer would also be required to file an annual statement (by March 1 of each year) summarizing the total CO purchases made by each purchaser. Failure to do so, carries a $10 penalty for each purchaser left off the filing. Of course, it’s easy to see the CO tax collectors using this information to dash off a tax bill to all the people on that list. This bill will be watched carefully.
CALIFORNIA: California has passed a new use tax registration requirement. It is for all business that: (1) have $100,000 or more in gross sales; (2) not already registered with the SBE (State Board of Equalization — CA DOR for sales taxes); (3) made purchasers from non-CA sellers who did not collect CA tax; and (4) used, consumed, gave away, or stored the purchased items in CA. If this applies to you, you would be required to file a report by April 15th each year. Oh, and one more thing — CA is a tough place to do business. Even federally exempt 501(c)(3) entities with over $100K in receipts have to register. If this applies to you, when you get registered, it you’ll also be required to file for 2007, 2008, and 2009 also. And yes, penalty and interest will apply. But you may request relief from the penalty. See this link for more details. Yikes. If you have concerns here, let us help. We can help you minimize the damage this could cause your business.