But what does this mean for your business? Learn more about the current state of online sales tax laws and how a small business can navigate tax complexities.
How Do Internet Sales Tax Laws Work?
Sales taxes are the domain of states in the U.S., and most states have different laws for businesses that sell products and services. In addition, localities, like cities and counties, have sales tax laws in 38 states. These laws say when a seller must charge sales tax as a part of a business sale, based on the type of product or service and the tax rate for that item and on the business’s tax “nexus”. Since the advent of the Internet, businesses have been selling products and services online, but not paying sales tax. States have been frustrated by their inability to impose sales tax laws on online sales. After years of confusion, the Supreme Court, in a 2018 case called S. Dakota v. Wayfair, increased the ability of states to require online sellers to charge sales tax by eliminating something known as the “physical presence” rule.
Tax Nexus in a State
A state’s ability to tax transactions is based on the concept of tax nexus, meaning that the seller has a taxing presence in the state. Your company can have a nexus if it is doing business in the state, including:
Having a physical office or a place where you conduct business (in your home, for example)Selling or shipping products to a buyer in the stateHaving a distribution center, like a warehouse or storage area, in the stateHaving employees who work in the state, including independent contractors, salespeople, representatives, or agents
Previous to the Wayfair case, nexus only applied to physical presence, limiting the ability of states to tax an online presence. With the physical presence rule now removed, states have started to crack down on making certain sellers charge online sales tax.
Sales Tax Nexus for Remote Sellers
The Wayfair decision allows states to extend the concept of nexus into online sales of remote sellers. A remote seller is a business that typically doesn’t have a physical nexus in a state but that sells products or services for delivery into that state. Most states will require only larger retailers to impose online sales taxes. What determines a “larger retailer” is set in each state, based on one or both of the following thresholds:
Sales (gross sales, gross revenues, retail sales, or taxable sales), or The number of transactions.
By 2023, 45 U.S. states will have laws requiring remote sellers to collect and pay state sales taxes on online sales, and each state has different thresholds. Here are a few examples, showing the wide range of requirements for threshold:
California requires remote sellers to charge sales tax if their total combined sales from in-person and remote sales is greater than $500,000 during the previous or current calendar year. Florida requires online sales tax if taxable sales of tangible personal property are greater than $100,000 in the previous calendar year. New York requires this tax if gross receipts are greater than $500,000 and the seller made more than 100 sales during the previous four sales tax quarters.
In many cases, the threshold for sales is $100,000.
State Sales Tax Laws and Your Online Business
Before you start selling products or services online, here are some suggestions for preparing to deal with online sales taxes.
Check To See if You Meet the Threshold for Online Sales Taxes in a State
Each state has a different way to determine if you are over the threshold for being a large seller and being required to collect and pay sales taxes. If you are under the threshold for your state, you don’t need to deal with this issue in your remote business. Because you don’t know where your products or services are going to be delivered, you must register in each state in which you go over the threshold.
Check State and Local Laws Regarding Internet Sales Tax
The best place to start is a state’s taxing agency to find their sales tax requirements. You’ll find information on key areas of sales tax, including:
Who must pay sales taxHow it’s calculatedHow to register for sales tax collectionHow to file and pay the tax Filing frequencyTaxes on remote sales
Consider Sales Tax Software
You may have noticed the implication of having nexus for online sales for every state into which you could potentially deliver products or services. And then there are many localities with sales taxes. The way to deal with this almost unimaginable complexity is to get sales tax software. Common software companies like Avalara and TaxJar automate the process of charging sales tax on your transactions, and they help you by tracking these taxes for each state and locality so you know how much and when to pay these taxes. They also follow rate changes, so you don’t have to.
