It’s safe to say we all knew sales tax would hit ecommerce someday. Well, someday was June 18, 2018, thanks to the Wayfair ruling.
Webgility recently attended the Prosper Show in Vegas for Amazon sellers and sales tax for Amazon FBA sellers was a hot topic. We listened to the experts, interviewed ecommerce sales tax professionals and talked with several Amazon sellers, retailers and brands about their take on sales tax law changes across the country. We concluded the synopsis below is what is needed to understand the concept of nexus and how to begin compliance.
Prior to the Wayfair ruling in June 2018, sales tax collection was determined by Quill v. North Dakota Supreme Court case where retailers simply had to have a physical presence in a state before they needed to collect sales tax. However, the Wayfair ruling overturned Quill v. North Dakota.
Today, retailers must have “some type of presence” in-state before the state requires sales tax collection. And “some type” now includes physical presence (which can be employees, inventory or a physical location). If the seller has sales in a state where it has no physical presence (has online sales) the seller must comply with each state’s “economic nexus.”
What is nexus?
The official definition of nexus is simply “a connection.” As used in conjunction with sales tax, it refers to connecting the seller to sales tax liability. The nexus definition is not one-size-fits-all. There are 50 states with over 12,000 sales tax jurisdictions, and while many share the same economic nexus, there is a sea of different nexus rules. Each state creates/controls its own economic nexus and they can change on a moment’s notice.
Simply put, nexus is a connection between the taxing jurisdiction or state and the seller. Most states have set their economic nexus as $100,000 in sales or 200 separate transactions before a seller collects sales tax in that state. Review all the states here to see the many variations in economic thresholds
Also, know there are five states without a general sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon. Note, some localities in Alaska and Montana have sales tax.
Once the seller has established sales tax nexus in a state or jurisdiction, the onus is on them to register as a retailer in each nexus state or jurisdiction to begin collecting sales tax from buyers. And, of course, remit the collected taxes to the respective states or jurisdictions.
Nexus types to help define compliance
There are several types of nexus that sellers need to understand to ensure compliance.
Click-thru nexus: This is when a remote person or agency promotes your products and gets a buyer to click on a link that leads to a sale on your marketplace or website and, in-turn, they receive a commission for the sale.
Home state nexus: The state where you have physical presence qualifies you for sales tax nexus and you must collect sales tax
Employee nexus: If you have remote employees or sellers working for you in other states, you have established sales tax nexus in those states
Economic nexus: (for states you do not have physical presence in) This is based on dollar and transaction volume. Check with each state you get sales from to see if you’ve reached that state’s economic nexus, which is typically $100,00 in sales or 200 transactions.
Marketplace nexus: When selling on a third-party marketplace, the marketplace typically collects sales tax for you. Check the state laws to learn where the onus lies for your marketplaces.
First steps toward compliance
- Determine where your sales tax liabilities lie. Review your sales volume and locations, number of transactions, inventory locations, remote employees or referrers by state or jurisdiction. Due diligence will help you identify what states you need to collect sales tax in and what each state’s economic threshold is. Here’s a time-saving Sales Tax and Transactions Checker that will determine that for you (with a 30-day free trial, no credit card needed).
- Once nexus has been established, you need to register as a retailer in your nexus states. You can do it yourself by downloading any state’s form here or have a service do the registration for you. Once registrations are submitted, the seller begins collecting sales tax.
- You’ll also need to know what sales tax to charge in each state or jurisdiction. Use this quick reference guide to learn state sales tax rates.
What about sales tax for Amazon sellers?
There are two conspicuously different situations regarding collection of sales tax on Amazon.
For all the states now in the Marketplace Facilitator program (Amazon defines a Marketplace Facilitator as a marketplace that contracts with third party sellers to promote their sale of physical property, digital goods, and services through the marketplace. As a result, Amazon is deemed to be a marketplace facilitator for third-party sales facilitated through amazon.com.), the taxes are levied and collected by Amazon without ever being passed on to the seller. For the most part, the seller does nothing. The exceptions for this would be Amazon sellers who live in one of those states. Each seller needs to know how their state wants that handled.
The other type of tax collection happens when a seller registers in their nexus states to collect sales tax, then sets it all up in their Amazon account, then adds the correct tax code to each of their listings. After that, Amazon levies and collects the tax on behalf of the seller. The tax is passed on to the seller who must file and pay it on to the state.
Keep in mind that Amazon charges 2.9% of each transaction in order to collect sales tax. The alternative many sellers have turned to is simply not to collect sales tax from your Amazon customers and pay out of your profits instead.
Clearly, sales tax compliance is not profitable; sellers may choose to focus on revenue-generating activities and hand-off the tedium to a tax professional or a software program.