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Before we dive into whether your business needs to collect sales tax, it is important to answer the question of what sales tax is. According to Investopedia, sales tax is defined as "is a consumption tax imposed by the government on the sale of goods and services. A conventional sales tax is levied at the point of sale, collected by the retailer, and passed on to the government. A business is liable for sales taxes in a given jurisdiction if it has a nexus there, which can be a brick-and-mortar location, an employee, an affiliate, or some other presence, depending on the laws in that jurisdiction." [1]
That might sound very technical so we are going to dissect the true meaning of the definition above. To put it simply, when your business sells physical goods or provides certain services, and you meet certain criteria imposed by local, or state agencies, then you must collect sales tax. Furthermore, you must file those taxes with the proper authorities by certain deadlines, but more on that later.
For most businesses, whether brick and mortar or online only, must collect sales tax in the state that reside in. Meaning, that if you run an online business in the state of Illinois, you must:
The above is called having nexus, which is a fancy way of saying that your business has a connection to the state that it resides in, and therefore, you must collect sales tax. There are other types of nexus which we will discuss in the next section.
There are different activities that your business may engage in outside of just making sales, that can trigger nexus with a particular state. The following are all activities that can trigger nexus.
In many states, if your online business has more than a set dollar amount of gross sales in the trailing 12 months, or engage in a certain number of transactions during that same 12 month period, then you have economic nexus with that state. This nexus is a result of a lawsuit between the state of South Dakota and the online retailer, Wayfair.
On June 21, 2018, the Supreme Court of the United States ruled in favor of the state in South Dakota v. Wayfair, Inc. This ruling allows the state to begin taxing remote sales via their economic nexus laws. Since the ruling, more than 40 states enacted economic nexus laws of their own.
As mentioned in the previous section, the most obvious way to trigger nexus is to have a physical presence within a state which triggers nexus. Physical presence includes renting or owning property, employing virtual workers, or storing inventory in a fulfillment center (such as Amazon).
Click-through nexus laws are relatively new as they came about in 2008 in response to the limitation of the physical presence limitation. If your online business has an agreement to reward persons in a different state for directly (or indirectly) referring potential customers through links on a website or otherwise, then you have triggered click-through nexus.
More than 20 states have click-through nexus laws, which may now be easier than ever to enforce. Although physical presence in a state still triggers nexus, states now also have the authority to tax remote sales: The physical presence limitation was overruled by the Supreme Court of the United States on June 21, 2018.
If your online business fits into any of the criteria above then you have nexus with either one or more states. At Millennial Financial we understand how difficult and overwhelming compliance with these regulations might be. That is why our accounting services include filing your sales taxes for you. Head over to our pricing page and find the plan that is right for you.
