As a result of the Supreme Court Wayfair decision in 2018, the majority of states have enacted economic nexus laws to collect sales tax on out of state transactions. What does this mean for companies presently? The days of “We don’t have an office or employee in the state we just sold services, therefore, we don’t have to collect sales tax” are long gone.
Each state that has enacted an Economic Nexus Law has their own specific rules to determine when out of state sellers are legally required to register and collect sales tax in their jurisdiction. There are two separate thresholds most of the states look at to determine when a company begins filing:
2. A transaction threshold
The most common threshold is $100K and/or 200 transactions in the previous 12 months.
Some states require both thresholds be met and others require only one.
An organizations accounting department must pay close attention to the transactions and revenue in each state to make sure the organization doesn’t cross the respective thresholds triggering the requirement to collect and remit sales tax.
In some of the worst cases, states are assessing penalties of up to 20% of the total revenue in their jurisdiction as the fines for not filing and remitting sales tax when required.
Physical Nexus means that your company has a physical connection to the state you are selling. You either have a store front, a warehouse, a sales person working in that state, etc.
Conditions that create nexus include:
Nexus and Sales Agents
Independent Sales Agents can be very helpful in growing a company’s revenue.
The often-overlooked issue Sales Agents create is their sales may force a company to have to file and collect sales tax in jurisdictions that may not have been planned on. Unfortunately, not only does your company now collect sales tax in multiple state – your company now needs to pay state corporate income tax in those states as well.
Nexus and Channel Partners
Resale Channel Partners create an interesting sales tax dynamic for wholesale companies. In most cases, when a wholesaler ships TPP to a reseller, the reseller needs to provide proper resale tax exemption certificates, otherwise the wholesaler should be assessing and charging sales tax to the reseller. This gets even more complicated when a reseller has product drop shipped to different state. Even though the wholesaler may know the product is being resold, without proper documentation for tax exemption, their Resale Channel Partner may not be legally conducting business in that State.
Tangible Personal Property (TPP)
Tangible Personal Property is any item that is movable and can be physically touched. Any item you may ship to a customer would be considered TPP.
When shipping TPP or anything that can physically be touched, those items are almost always subject to sale tax in those States that have sales tax laws. In dealing with TPP, sales tax is almost always assessed where you ship the item, NOT where you bill the customer. If you ship an item to a customer’s headquarters address and they send it to an employee in another state, you should charge the customer sales tax at the headquarters address where you shipped it to.
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