Your Retail Clients May Require Immediate Sales Tax Registrationby
Many businesses share the goal of increasing sales and expanding into new markets. But, now that most states tax sales are by out-of-state sellers, such growth often brings new sales tax collection obligations.
This time of year like no other, your clients are flooding you with pressing tax questions. But in recent times, none have been more vexing than that of your retail clients in relation to their sales tax nexus obligations.
As you may know by now, the Supreme Court on June 21, 2018 essentially ruled that state tax authorites have the right to collect if enough is sold in their state, regardless of whether the seller has a physical business in that state. On our site, keeping you as tax professionals informed has been our goal and, more specifically that of our regular contributor and sales tax expert Gail Cole.
Below is an article whereby she updates the current state of sales tax nexus and the importance of registration, in some case near immediate registration sales tax collection. If you have retail clients, you'll want to read on and stay connected to these articles.
Taxing remote sales is relatively new. Since the first states established their sales tax systems in the 1930s, states have had limited taxing authority over businesses based in other states.
Indeed, the Supreme Court of the United States ruled more than once during the 20th century (notably in National Bellas Hess, Inc. v. Department of Revenue of the State of Illinois and Quill Corp. v. North Dakota) that states could not require a business to collect and remit sales tax unless the business had a physical presence in the state.
But the Supreme Court overrules that longstanding physical presence rule in its South Dakota v. Wayfair, Inc. decision (June 21, 2018); it determined ecommerce had “changed the dynamics of the national economy” to the extent that the physical presence rule had become “a judicially created tax shelter” for certain businesses. In so ruling, it allowed states to base a sales tax collection obligation solely on a remote seller’s sales in a state, or economic nexus.
Today, as we quickly approach two years since the seminal ruling, 43 states and Washington, D.C. have economic nexus laws or rules requiring out-of-state businesses with a certain amount of sales in the state to register their business, collect and remit sales tax and file returns. Florida and Missouri will likely soon follow suit.
The five remaining states — Alaska, Delaware, Montana, New Hampshire, and Oregon — don’t have a statewide sales tax. However, local governments in Alaska are interested in requiring remote retailers to collect and remit their local sales taxes.
All this is to say that if your clients are in the business of making sales, they could already be liable for sales tax in states where they make sales but aren’t collecting. And if their business is growing, their collection obligations could grow, too.
The Importance of Economic Nexus Thresholds
With the exception of Kansas, all state economic nexus laws or rules provide an exception for small sellers. To that end, they’ve all established an economic nexus threshold: Sell below the threshold and you don’t have economic nexus; sell above it and you probably do.
Thresholds vary from state to state and include:
• $100,000 in sales (e.g., Massachusetts and North Dakota)
• $100,000 in sales and 200 transactions (e.g., Connecticut)
• $100,000 in sales or 200 transactions (e.g., South Dakota and Wisconsin)
• $150,000 in sales (e.g., Arizona)
• $250,000 in sales (e.g., Alabama)
• $500,000 in sales (e.g., California and Texas)
Keep in mind that states include different transactions in their thresholds; electronically delivered products, digital goods, exempt sales, or services should be included when calculating the threshold in some states but not others. Some states want retailers to include sales made through a marketplace, while others don’t. Individual state threshold information is available in our state-by-state guide to economic nexus laws and state-by-state registration requirements for marketplace sellers.
If your clients sell into states where they’re not collecting sales tax, you should check to see whether sales in those states have crossed the economic nexus threshold. If they have, those sellers may have developed a sales tax collection obligation in one or more states. As their trusted tax advisor, you can help determine next steps.
The Importance of Tracking Sales
If your clients haven’t crossed an economic nexus threshold but do make sales into states where you don’t collect, it’s important to monitor your sales in those states closely. In some states, you need to register with the tax authority and start collecting sales tax as soon as you cross the threshold. As in, tax must be applied to the very next sale.
It appears you must register with the tax department before the next invoice after crossing the threshold in the following states:
• District of Columbia
• South Dakota
In Ohio, you must register the day after you cross the threshold. The remaining states give you a bit more time: 30, 60, or 90 days after crossing the threshold, by the next quarter or by January 1 of the following year.
Do the above states really expect businesses to register so quickly after they cross their economic nexus threshold? What will they do if you don’t?
I don’t know. I do know that these policies seem to suggest that states expect businesses to closely monitor their sales into all states.
I also know these states are eager to collect remote sales tax revenue. States take this stuff seriously. They wouldn’t bother creating thresholds if they didn’t matter.
Gail Cole is a Senior Writer at Avalara. She’s on a mission to uncover unusual tax facts and make complex laws and legislation more digestible for accounting and business professionals — or anyone interested in learning about tax compliance.