What is Sales Tax Nexus & What Does it Have To Do With Holiday Sales?
Rick Bromund demystifies sales tax nexus and how it could come into play for your business with an increase in sales during the holiday season. Have a question? Ask when you register & we'll try to answer it during the webinar!
Rick heads up the tax research team at ComplYant. He's an experienced professional in the tax industry and has previously held positions at Fortune 500 companies as well as one of the big 4 accounting firms.
Note: This topic covers U.S. business taxes only.
- 1:38 - What is sales tax nexus?
- 2:02 - How do you know if you have nexus in a state?
- 3:40 - What businesses are affected by nexus rules?
- 5:40 - Potential challenges
- 8:22 - What does this have to do with holiday sales?
- 10:51 - What if I sell on a marketplace?
- 14:03 - Q&A
If I sell products and services is the income on my services included in the nexus calculation?
It depends on the state. You may have to register. Let's say it says all gross sales are included in the nexus calculation. So if you sell 50% that's nontaxable, 50% that's taxable, you have to send in that information to the state, they're gonna say, yes, you are required to register.
Now, once you're registered, you won't have to charge sales tax on those non-taxable services, but you'll have to charge sales tax on the products that you sell that are taxable. And again, this is where it gets down to the language of how each state clarifies it. There are other states that say, no, you only meet the threshold when your taxable products meet that hundred thousand 200,000 or number of transaction threshold.
How do I report sales tax?
For the most part, you would run a report and see the sales tax you collected for the period, you're filing period. It could be a month or quarter if you're emitting a very small amount, or it may be yearly. But you would go fill out the return and then submit the payment with the return.
In your state, you may be able to file and pay online. In fact, in some states, they actually require it, and I think you have to fill out something to explain why you can't do it online to avoid sending it in an actual check. But the good thing is online, it's pretty simple, and it's pretty straightforward. They do try to make it easier for you. And then once you press the button to pay, it's paid, you don't have to worry about that getting in the mail, getting delayed, and then getting a late filing fee on top of that.
Webinar Transcription: What is Sales Tax Nexus & What Does it Have To Do With Holiday Sales?
Aerin: Thanks, everyone for coming. We're excited to have you here today. I'm Aerin, the marketing manager at ComplYant. We're a technology platform that helps small businesses manage their taxes and our tool help, you know what taxes you need to pay and when among a myriad of other awesome things. So if you haven't checked us out yet, you should visit our website at www.complyant.co, that's www dot C O M P Y A N Tdot co.
Leading today's webinar we have Rick Bromund, who is the head of our tax research team. He is an experienced professional in the tax industry and he has worked for fortune companies as well as the big accounting firms. During the webinar today, if you have any questions, please feel free to throw them in the chatbot or in the Q and A tool. Both of those icons can be found at the bottom of your zoom screen, and we'll get to as many questions as we can at the end of this presentation. Take it away, Rick.
Rick Bromund: Thanks, Aerin. Thanks, everyone for joining us today. We'll go through the deck here. I'm going to turn off my camera while we go through and then come back on for the question portion of the webinar. What the heck is sales tax nexus and what does it have to do with holiday sales? So first of all, what is the sales tax nexus?
So if tax wasn't scary enough they like to throw in big words and in its simplest terms, nexus just means connection. And when we talk about sales tax nexus, what we're really looking for is does your business have enough of a connection to a state to register to collect and remit sales tax? How do you know if you have nexus in a state?
There are two main types of nexus, physical and economic. Physical had always been for the longest time the bedrock go to if you have an office in a state or if you have employees or even a temporary presence. So what does that mean? So obviously, let's say you're sitting in California, you have an office, a home office, whatever, you have physical nexus in the state, you need to register and collect tax. If you have an employee in your state, let's say California, or if you have an employee in a neighboring state or somewhere else, Arizona or Nevada, you most likely meet physical nexus in those places.
Temporary presence is a tricky one. And it's just what it means, temporary presence, that could be a trade show that could be an employee sales employee, making periodic trips to other states. Depending on the state's regulations, they may deem that temporary presence as enough of a connection to register and collect sales tax in that state. The other one, which is newer based on a Supreme court case that came down a couple of years ago is economic nexus.
And this says you don't have to have that office, that employee, that temporary presence in the state, all you need to do is sell into that state, meet a certain number of sales dollars threshold or a certain number of transactions. And we'll get more into that, what those requirements are a little bit further down. So what businesses are affected by nexus rules? Nexus rules can apply to pretty much most if not all businesses in some way.
Here's an example. So Montana is one of the states that doesn't have sales tax. So you might think I have a bookstore in Montana. I don't have to collect sales tax. These nexus rules don't apply to me. If that Montana bookstore owner says, you know what, I think I might go down to Wyoming, check out a trade show, set up a booth and you know, whatever. Well, unfortunately, for him or her Wyoming says a trade show attendance, one day is all it takes, is considered physical presence in that state.
So now that Montana bookstore owner, who's not required to charge sales tax in his state, now has to register and has met a threshold for physical presence in the state of Wyoming. In the same scenario, Montana bookstore sales are lagging, they've always had just a brick and mortar and they want to get into online sales. Well, now they have to be aware of where they're selling online and when their sales meet the thresholds or the number of transactions into the states that they're selling into.
Another scenario could be services, services are generally non-taxable or if you are selling some other non-taxable products. The keyword here is currently, so the services and products that are currently non-taxable, you may think you don't have to worry about the nexus rules, but states are always looking to increase the revenue base and service or non-taxable products may be exempt today, could easily be put on taxable category tomorrow. So it's always important, even if it doesn't affect you currently, to make sure that you're aware of any changes to the places you're selling into.
Potential challenges. Potential challenges that you'll come across in every state are different. From what triggers nexus to the requirements, to even the language, the way it's written. Some examples are we spoke about that Montana bookstore owner going to a trade show where Wyoming says that a one-day trade show is good enough for physical presence.
Other states might say, if you have an employee come into the state just for one day, you now have a physical presence. Other states will say, you know what, not one day, one day is not enough. You have to have an employee coming in on a regular basis. And some other states will even go further and say, not just on a regular basis the employee has to contribute to the sale of the product somehow, either taking the order or facilitating the order fulfillment in some way.
So again, you have to be aware of what the rules are for the state that you're selling into. On the economic nexus side, let's say California, they have a threshold of $500,000. So the tricky thing is here, let's say you sell big-ticket items. If you have one sale in California for $510,000, you meet the economic nexus in that state. Or on the flip side, if you sell something for $10, you have a greater amount of sales to meet that 500,000 mark.
Georgia, for example, they have their statement in there. So they have a hundred thousand dollars of sales or 200 transactions into the state creating an economic nexus. So let's say you sell $50,000 into Georgia, but those $50,000, while it's under the hundred thousand dollars threshold, occurred over 200 transactions. You've now met nexus in the state of Georgia and you're required to register and collect tax.
Now here's what we get into the language, New York and Connecticut, they try to resolve this by including "and." So in New York, you have to have $500,000 in sales and a hundred transactions.S o if you have, unlike California, if you have one five hundred thousand dollars transaction to the state, they're gonna say, that's not enough. That's an occasional sale. We're not gonna burden you with collecting sales tax. You have to have $500,000 in sales and a hundred transactions. And Connecticut kind of follows as well, where they say, you have to have a hundred thousand dollars in sales and 200 transactions.
So what does this have to do with holiday sales? Holiday sales for most people, depending on what you sell, you have an increase in the number of transactions and the number of a higher amount per transaction. So if people normally buy one item, maybe they're buying two or three, so the number of each transaction has a higher dollar amount associated with it.
And what does that means for you? Well, let's say again, you're selling into Georgia and they have a hundred thousand dollars, 200 transaction threshold. Well, let's say you're selling a $5 item, but it becomes the hot item of the season. You can sell 200 of those $500 items in 200 separate transactions and you've met nexus in Georgia, even though you've only sold a thousand dollars worth of product. And what's interesting to know is the timing of when you sell this, it's always important to know as you're going into, not just holiday season, but anytime during the year, if you're approaching nexus in a particular state. And it's important because while some states say, once you've hit nexus, you have 30/60 days, you know, the first month of the following quarter.
In this example, Georgia says the next dollar or the next transaction after that hundred thousand and 200 transactions kicks in, you have met nexus, and you are now required to collect tax. So let's say, you're at 190 transactions, your sales kick up on the Friday after Thanksgiving, and you blew through the transactions you've met nexus in the state, but you didn't do any of the work to file for a sales tax certificate and get registered. On those sales after the 200, you are liable for the sales tax on that.
So let's say it's that Friday you go through the weekend, you don't start the process till the following week, and you don't get your application for a few days later. So you're not able to go back and change those customer sales taxes, but on all those transactions that occurred, you are responsible for remitting that tax to the state out of pocket. So what if I sell on a marketplace? You know, a lot of sellers now they'll use Amazon or a marketplace exclusively, or they'll do kind of a hybrid mix. They'll use their own online website and also sell on Amazon,eBay, Etsy, and Walmart.
What's key to know here is what is considered a marketplace. So we have what's called MTC, which is marketplace tax collection. And we also have, what's known as TCS, which is tax collection services. So a place like Amazon, Walmart, and Etsy, they're required now to collect tax on behalf of the sellers, the states think it's easier to audit Amazon and all the sales that have flown through them to make sure that sales tax was charged on it.
So if you're selling on Amazon, and let's say you're selling on Amazon in Washington state. They can say, you know what, we're automatically charging the tax. We are collecting a tax. We are remitting it directly to the state. That's fine. You don't have to register for Washington sales tax cause the burden is on Amazon and those other marketplaces. What's different is the tax collection services. So a place like Shopify is not considered a marketplace. What they have are tax collection services. So when you're signing up for Shopify you have the option, you know, check the button, do you wanna charge sales tax in this state? If yes, you click it. Very different because you have to already have your sales tax sellers permit the collection, all that information for Shopify because they don't know if you're registered or not, I think they ask for a number, your registration number, but they don't verify it.
So what they do on the items you sell, they will collect the tax from the consumer and pass it on to you. So if sell a $10 item, they will pass on that $10. Plus, let's say the 80 cents in tax that was charged with that. And then that is now your responsibility to take that, file the return, and remit it directly to whatever state you're you're selling into. However, it's extremely important that you are registered to collect and remit sales tax in that state where you have those services turned on. It is considered unlawful to collect sales tax without a permit because it's essential you are taking the government's money and holding it until you register and then remit it back to the state.
So a lot of different nuances, a lot of different things between what's considered a marketplace, and what's not considered a marketplace. I think as Shopify goes on, I know they have some fulfillment centers, so they may be working their way more towards a marketplace, but as it sits now it's not considered a marketplace, and they do not collect and remit on your behalf. We are gonna open up for questions now and I think you can type any questions into the chat.
Aerin: Yes, absolutely. So if you have any questions type them in the chat, you can type them in the question and answer box and you can also email us if you're not comfortable asking live for some reason. Although, the question and answer box is anonymous. We'll throw up our email at the end of the presentation. So the first question I have is could you clarify when I collect tax after hitting the threshold, do I need to pay sales tax on the previous sales before the threshold?
Rick Bromund: No. So let's say, the threshold is a hundred thousand, anything before that hundred thousand is not taxable, they don't go back and look at the previous hundred thousand, but any dollar after that hundred thousand is subject to tax or any transaction amount past, let's say it's 200, you know, the amount of the transaction for transaction 201 that has to have tax. But you do not have to go back and apply tax to the previous amount that got you to the threshold.
Aerin: Cool. The next question is, do you know if Alavara remits taxes on my behalf?
Rick Bromund: I'm not familiar completely with Alavara services. I believe they do have API tax calculation software. They may pass it, but I'm not aware if they actually remit it to the state directly for you. And that's a good question. If you are using a third-party provider, it's very important to make sure if they're remitting the tax for you or if the funds that they send to you the taxes are included and you have the responsibility. It's very important to make sure who's bearing the burden of collecting and remitting the taxes.
Aerin: Do I have to charge sales tax?
Rick Bromund: You have to charge sales tax. It depends, and I know most people hate hearing that answer. It depends on what you're selling, depends where you're selling. So if you're selling a non-taxable item, let's say it's a service that's non-taxable, no, you do not have to charge sales tax. If you're under the threshold, you don't have to charge sales tax, but it's extremely important to always keep up to date with what you're selling. Or I should say with verifying if the state has changed, how they treat the taxability is what you're saying, it can get extremely complicated on some of the more services sides.
I think if you're selling, you know, let's say chalkboards, that's pretty much gonna be a taxable sale, but if you're into service and the more complicated the service gets if you're in certain states and if it's installation services versus fabrication service, it's extremely important to see how the state clarifies those particular services. So a good thing, if you're not sure, go to the state when they put out the guidance of what's taxable and what's not, while they won't change for the most part what's taxable and what's not, they may send out the guidance of, you know what, we've got a lot of fee or audits have come up. This is what we mean. These are certain scenarios where this would be taxable and where it wouldn't be.
Aerin: Just so we can leave it up for folks who need that information. So last couple of questions. Does sales tax only apply to states or does it also apply separately to cities or differently, I guess?
Rick Bromund: Good questions. So it's gonna depend on where you are. Like Mississippi, I believe last time I checked Mississippi had an 8%, maybe it was seven or eight, either way, it had a state sales tax. So it was just a flat percentage across the state. And I believe maybe Jackson had a small fee into the city for that.
But if you get into someplace like California, California has a state rate, they have a county rate, and they have different jurisdiction rates, like the city of Los Angeles. So you should only have to really remit to the state and most states will go take the collection as a whole and then disperse it downward to the county and municipalities.
Colorado is different. Colorado has what's called home rule states. And I believe Alabama has some of that too, where the home rule basically says we don't want the state collecting our money. So you have to send the state portion to the state. If you're selling to different jurisdictions that are home rule in Colorado, you have to file individual returns to the individual localities for them to get their money.
Aerin: If I sell products and services is the income on my services included in the nexus calculation?
Rick Bromund: So that's gonna depend on the state. So you may have to register, let's say it says all gross sales are included in nexus calculation. So if you sell 50% that's nontaxable, 50% that's taxable, you have to send in that information to the state, they're gonna say, yes, you are required to register.
Now, once you're registered, you won't have to charge sales tax on those non-taxable services, but you'll have to charge sales tax on the products that you sell that are taxable. And again, this is where it gets down to the language of how each state clarifies it. I know there are other states that say, no, you only meet the threshold when your taxable products meet that hundred thousand 200,000 or number of transaction threshold.
Aerin: We'll let everyone have about five minutes of their life back, thank you again for joining us. The last question is how do you report sales tax?
RickBromund: How do you report sales tax? So for the most part, again, with every state being different, for the most part, you would run a report, see the sales tax you collected for the period, you're filing period, whether it's a month or quarter if you're emitting a very small amount, it may be yearly. But you would go fill out the return and then submit the payment with the return.
And I believe every state you can file and pay online. In fact, in some states, I know they actually require it, and I think you have to fill out something to explain why you can't do it online to avoid sending it in an actual check. But the good thing is online, it's pretty simple, and it's pretty straightforward. They do try to make it easier for you. And then once you press the button to pay, it's paid, you don't have to worry about that getting in the mail, getting delayed, and then getting a late filing fee on top of that.
Aerin: Everyone, thank you so much for joining us today. If you have any other questions or you have any thoughts about what other webinars you'd like us to cover, or what topics you'd like us to cover on these webinars, we'd love to hear from you. You can email us at the email on the screen or visit our website and contact us that way. Thank you again for joining us and we'll catch up on the next one.
Rick Bromund: Thank you.