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:
- Materiality — Is the level of sales into that state enough to warrant a concern about sales tax? We have a good article that discusses materiality in more detail.
- Past Exposure — States can go back to when you first had nexus in that state and assess you the tax you should have collected from your customers. If you’ve been in a state for many years, this has to factor into your analysis.
- Penalties and Interest — Typically states will assess at least a 10% penalty on late payments. Interest varies all over the board, but it accrues from day one, so it’s not unusual for interest to become very significant.
- Cost of Compliance — In your analysis of when you should start collecting tax, factor in how much it will cost each month to calculate the tax due on your customer invoices and then how much to fill out the monthly/quarterly/annual forms and remit the tax. The cost of this “compliance” has come down tremendously over the years, but it’s still not free.
- Audit Exposure — If you sell to large businesses, chances are your invoices will be seen by some auditor somewhere. If you make small sales to only individuals, the chance you will be audited for sales tax go down significantly.
- Remember the Biggest Tragedy in Sales Tax — Be conservative about sales tax collection. Don’t become a victim.
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.
- You can go to each state’s Department of revenue or its equivalent to find out how to get registered. The easiest way to find correct information is to Google the state DOR with the words sales tax registration and you’ll get what you’re looking for. Some states have an online registration process and some do not. In some states you may want to choose a paper registration over the online registration, because the online registration may require additional potentially unnecessary registrations. An example of an additional registration that may not be needed is a Secretary of State registration.
- You can hire someone, like PJCo to do the filings for you. Our process involves you telling us where you want to be registered, you providing us with some required information and us handling the rest. Our experience helps streamline the process and provides for a less stressful more efficient process.
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!