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Small Business Digest


States Seeking To Take More Sales Tax From Out-Of-Locale Small Businesses

Mark Faggiano

These days, states are searching for new revenue sources.  Taxes are a common way to increase revenue. Many states have eased nexus laws with the intention to require more companies that sell products online to collect sales tax.

Mark Faggiano, President of talks about what are some of the ways states have of legally demanding tax revenues from small businesses.

First, what is “nexus” exactly? It simply means according to tax rules that a business has a presence in a state that is significant enough to require it to; procure a sales tax license ,collect tax on goods shipped to customers in the state, , and pay that tax collected to the state on a frequency the state determines,” Faggiano says.

He offers some background on the question of sales tax.

  • There are forty-five states that levy a sales tax, meaning merchants in those states are required by law to collect taxes if they sell taxable goods or services.
  • Sales tax is considered a “pass-through” tax, meaning the merchant is just holding the tax collected until it is time to send to the state at a designated time (monthly, quarterly, etc.)
  • The rules for the levying and collection of these taxes vary widely from state to state, for example some require merchants to charge tax on shipping costs. Note when it comes to figuring out tax rates, most states are either “origin-based” or “destination-based.”
  • The first group of states requires merchants to collect sales tax at the rate effective at the point of “origin” (meaning your warehouse or office) and others use the “destination”, or buyer’s address.

Faggano offers three different scenarios that can cause a company to establish nexus in a certain state:

  • If a company uses a third-party fulfillment service to store and ship their inventory. That inventory stored in another state is considered nexus. This can be an impediment especially for Amazon FBA sellers, as they might have merchandise located in more than a dozen states that currently house Amazon fulfillment centers. 
  • Say a business based in one state sends some sales reps to a conference in another state for its first foray into sales in that new area. Depending on the state-specific laws, it’s possible the sales activity has established nexus for that business. That means the business is required to register with the new state to collect sales tax.  
  • If a company begins working with some affiliate partners in New York who put a link to the company onto their web site and begin generating revenue, then they might be establishing nexus. Several states including Tennessee are close to enacting bills which will establish nexus based on if a company maintains or operates affiliates in the state.

As Faggiano points out, “Many of these instances of nexus can take retailers by surprise, especially when nexus can be established without a physical presence in that state. Remember, state agencies don’t take “I didn’t know!” as a viable excuse.”

He adds, “It’s the responsibility of the company and any CPAs working with the firm to know the rules and put in place the right procedures to follow them.”

Here are Faggiano’s tips to stay in tax/nexus compliance:

Think about presence as more than just traditional physical brick and morter. If a business is making sales and engaging in other activities in a state, it’s a pretty safe bet it has created nexus.

  • Check the laws in each state where the company will be making sales. The rules vary state-by-state and proper management and accounting can prevent potentially catastrophic audits. Some companies have operated for quite some time within states without collecting the right sales tax. Once an audit comes through the tax bill can be so substantial as to put the company out of business.

As the complexity and reach of a business grows it exposes itself to more potential nexus issues.

Sales representatives, out-of-state service calls, and affiliate partnerships can all trigger nexus and the need to charge and collect sales tax.

Companies faced with this challenge should consider using a third-party software solution such as that allows merchants to easily manage any sales tax obligations.

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