Sales Tax Requirements for Economic Nexus on Out of State Sellers

The Changes in Sales Tax Laws You Should Know as an Out of State Seller

Welcome to the evolution of Nexus. Having a physical presence in a state is no longer the only thing that dictates if you are required to collect and remit a state’s sales tax as an out of state seller. Economic Nexus, conducting a considerable amount of business in the state based on a dollar amount or number of sales, is also nexus.

Many states over the past 2 years have been making this change and rolling out new rules to capture their rightfully-due income. The Wayfair vs. South Dakota case made it to the Supreme Court and this news brought the changes out of the woods and onto the main stage.

These changes were expected by many because the impact eCommerce has had on State Sales Tax Collections. 

States can better enforce collection on the side of businesses, because they are required to file returns. Whereas expecting an individual to joyfully and honestly pay Use Tax has proven near impossible. Use Tax is owed on purchases made out-of-state where the seller was not required to collect sales tax and the individual is the end user. Use Tax is still relevant, and the Economic Nexus laws will help alleviate some of this loss.

Below is a chart that lists the states that have current laws ruling Economic Nexus, and includes their threshold for Dollar Amount and Number of Sales. This information has been provided by the Sales Tax Institute in a webinar on June 26, 2018 sponsored by Avalara.

CLICK HERE TO DOWNLOAD THIS CHART AND THE SLIDES FROM OUR WEBINAR WITH JEWELERS OF AMERICA.

Please note, these thresholds could include all Revenue, not just Retail sales. Each state is different, and if you sell both Retail and Wholesale, or Services, all sales income contributes to your total Revenue threshold amount, even if they are Tax Exempt in a specific state. So, whether your Sales are Tax Exempt or Not, you will need to verify if a state’s threshold includes all sales, or only taxable sales. For example, you may be required to register and remit zero ($0) Sales Tax Returns, because while you meet the threshold to file, the sales you make are tax exempt.

These changes cause fear in many, and may cause people to charge sales tax when they should not. So, make sure that your vendors are still not charging you on items you resell, because Wholesale stays tax exempt.

Sales Tax is only collected from the end user. 

So, what is with the Effective Dates?

Especially the ones that are older? Collection of Sales Tax is Prospective from the Effective Date. It is not Retroactive for S. Dakota and 38 signed a not-retroactive collection agreement. For states that have older effective dates of when they initially set this into law, if you were required to comply and have not, many are offering relief of penalties and even exemptions, so check with each state where you meet their threshold at any time past their effective date.

What is the impact on international sellers?

These rules will apply to international sellers to collect and remit on all states they sell to, but many states have already in the past made this requirement on imports. Again, it is your responsibility to verify that you meet all laws of the states you sell into. Due to Economic Nexus and the Supreme Court ruling, many states are reducing thresholds for international sellers too.

How do I know I should be collecting Sales Tax for another state?

If you’re wondering at what point would trigger you to start collecting sales tax, the current guidance recommends reviewing the prior 4 quarters.

1. Estimate based on what you have sold in the past if you are close or meet the thresholds in any given state.
2. If so, and business is consistent, then it would be wise to go ahead and register with that state and start collecting.
3. You are required to register and collect sales tax to remit it as soon as you have met the number of transactions, or threshold amount. Anything past the thresholds requires you to collect and remit.

You do not want to pay Sales Tax out of your pocket or consider it Tax Inclusive, if you have not actually calculated including it in your Retail price. Sales Tax is Statutory, which means, it never goes away if you owe it. You as the seller are responsible for collecting and remitting it, so if you collect it from your customer, it is not yours and you must pay it to the state. If you do not collect it, but you were supposed to, they you still owe it and it’s your fault for not collecting it. It is not something that can be forgiven or go away in bankruptcy.

Is Physical Presence dead?

No, Nexus as a remote seller that has salesmen or a show as a physical presence, but no permanent location, still falls under the tests that remain for Physical Presence Nexus. So while you may fall below the Out of State Economic Nexus threshold, you may still qualify to collect and remit sales tax based on Physical Presence Nexus because they are different rules.

Does this mean we no longer have to pay Use Tax?

Use Tax automation adjustments will be necessary. This means that you likely still have to pay Use Tax on items when you buy items that are not for resale and the vendor didn’t collect sales tax because they are under the threshold for your state.

If you are not sure what Sales and Use Tax are, here is the A4J quick and easy explanation of Sales and Use Tax: 

Sales and Use Tax are different perspectives of the same thing. A seller collects and remits Sales Tax to their tax authority, while a buyer who wasn’t charged sales tax owes Use Tax.

You are the buyer when you buy things for your business that are not for resale and that you did not pay Sales Tax to the seller. For example, when you buy tools from an out of state supplier, and you use those tools in your business, then the purchase price of the tools is your Use Taxable Purchase and sales tax or “use” tax is calculated on the purchase.

You do not owe Use Tax on anything that you sell. Think of it this way: everything needs to be taxed, so the Nexus rules try to make it easier for States to collect because it is easier for businesses to comply and be audited than individuals.

If you buy something as the end user you pay the vendor sales tax, just like you collect sales tax from your retail customers and remit it.

When a customer buys from you out of state and you ship it to them, you don’t charge sales tax unless you have a physical presence or economic presense, aka Nexus (sales rep, storefront, considerable dollar amount of sales, etc), in the state where the customer is.

If you don’t charge them sales tax, then that out of state customer is responsible for paying their state’s sales tax on that item. It’s called Use tax, bc they are the end User. Flip it around and it goes the same way for you and anything you buy. If you’re going to resell it, the end user pays. If you are the end user, you pay.

You collect and remit Sales Tax on behalf of your customers to your state and any state where you have nexus. When you buy things that are not for resale, but are used in your business or for yourself personally and you did not pay sales tax at the time of purchase (because that seller wasn’t required to collect it from you), then you owe use tax. (Purchase price amount x your state’s sales tax rate = use tax). Cool? Cool.

What is the Cost and Burden on Sellers to Comply?

Key considerations of Congress and each State is to make sure there is not an undue burden on out-of-state sellers. The thresholds definitely help small businesses, but for businesses that do meet these floors, each state still has it’s own Registration requirements as well as varying portals to remit the tax online. (Almost all states now require tax returns are e-filed.)

The cost to collect, the time to prepare and submit can be heavy. Even reviewing to know if one qualifies or not for all states they sell to take time. The Streamlined Registration Consideration came out about 30 years ago with the Quill ruling that states need to make it simpler for sellers to comply.

Some state pay for Volunteer Filers, for example, where the registration fee is waived or a discount for filing on time is given becuase the seller is doing their part to comply without receiving forced notice, late penalties, etc.

Reporting requirements in states such as Colorado, where there are many districts and each has their own website and registration for documentation has to go. Colorado is a Home Rule state, but has not yet passed an economic nexus law, so we don’t know their perspective on it. The hope is that there has to be consistency on the rates and reporting requirements, as well as exemption documentation for wholesale and services across the board in all states.

Ideally, in my opinion it would be one rate and one portal for collection with only one registration. Needing to do this in so many states is a burden. In some cases, the only way to comply is to have a company like Avalara file and manage the taxes for you.

Happy taxing! Please comment below if you have more insights than what I have shared here, or if you have questions or feedback.