Ecommerce Sellers & Economic Nexus
Customers have been flocking to the internet in droves for years because of “tax-free” online buying. States could not require out-of-state enterprises with no physical existence in the state to collect sales taxes. In the case of South Dakota v. Wayfair, Inc., the Supreme Court of the United States overturned the physical presence criterion in June 2018. States can now charge distant merchants a sales tax based on economic nexus (the volume or dollar value of transactions into the form) and physical presence.
Economic Nexus- What?
The term “nexus” refers to the link between a state and a company that allows the state to tax the company. Under economic nexus rules, sales tax collection obligations are based on a company’s financial activity in a region, such as sales volume and number of transactions.
In the Wayfair case,
South Dakota imposed a threshold of >$100,000 in yearly sales or >200 purchases from buyers within the state. Other states are now attempting to set similar standards, but not all have defined explicit norms.
Each state can assess your company. In other words, if you have an economic connection in all 50 states, you must collect sales tax in each of them separately. To prevent significant penalties, it’s critical to conduct a proactive audit of your nexus and register for sales tax permits where relevant.
Wayfair Changed Everything
For states — and, by extension, corporations — the Wayfair judgment was a watershed moment. States took the decision and ran, although they are generally sluggish to adopt a shift of this size. Hawaii, Maine, and Vermont began taxing distant retailers less than two weeks after the gavel fell, using economic nexus statutes they had in the works. By the end of the year, almost 20 more states had enacted financial link laws.
By the end of 2020, Florida and Missouri were the only two states without an economic nexus statute; several jurisdictions in Alaska, which has no statewide sales tax but enables local governments to impose local sales taxes, had implemented economic nexus. Delaware, Montana, New Hampshire, and Oregon have no sales tax. As a result, every state with a sale tax now has an economic connection statute. Not all economic link laws, however, are the same.
There are three things that every small firm or startup should undertake in light of the new sales tax reality:
It’s a great idea to do some study if you’re starting your firm or expanding into other states. Businesses’ sales tax requirements aren’t as straightforward as they formerly were. If you’re not clear what nexus means for your firm, it’s time to seek advice from a tax professional.
It can be more cost-effective and accurate to have a third-party manage your registration and returns than it is to do it yourself. You may put your business in danger if you don’t have a full suite of IT solutions that address every stage of sales tax compliance, from real-time rate calculation to on-time returns filing to business licensing and tax registration services.
You’ll be better prepared to deal with future sales tax responsibilities if you have a dependable sales tax solution in place today. You need a system that can scale with your company, starting with low-cost pricing for small businesses and progressing to a robust enterprise-level platform as you expand into new states.
Compliance with sales taxes is complex, and it isn’t expected to get any easier very soon. That doesn’t mean it has to consume resources and be a drain on your company’s resources. Do your homework, and don’t hesitate to seek professional assistance with sales tax computations, state registrations, and return filing.
Who’s the Most Affected?
Shippers should be dropped—sellers who solely sell online. Small and medium-sized businesses have a more vital economic link than physical ones. Drop shippers and wholesalers find themselves in a unique situation. Sellers must know where to collect taxes and how to avoid paying taxes to vendors.
To avoid paying tax on a transaction, vendors must get the appropriate exemption/resale certificate from retailers. If a seller is not required to collect sales tax in a state where they “ship to” or “deliver to,” the vendor may be required to collect sales tax from the sellers unless they have a valid certificate for each “ship-to” state.
The economic link will impose tax requirements on online merchants and small-to-mid-sized firms that did not exist previously. If you have a brick-and-mortar business, workers, or warehouses (among other physical entities) in a particular state, you may be required to begin collecting taxes if you make sales there.
While larger businesses may have been collecting taxes under physical nexus or have the means to check compliance, smaller companies may need to invest in new tax services. The bundled expenses of paying sales tax and complying with regulations may impact product prices and trickle down to purchasers.
One of the best things about e-commerce is that it allows you to reach people all across the country and the world. One disadvantage is that you can establish economic nexus in any state where you have clients, which means you may be required to register with the tax agency, collect tax on taxable sales, validate exempt transactions, and timely file and remit sales and use tax returns. Learning about the economic link is the first step toward compliance. The second step is to figure out where you’re most likely to get it.