Wayfair continues to impact the way online sellers operate. Calculation is a challenge, collection is a challenge, and planning is a challenge. Another challenge? Finding out whether you even need to do so for each state in the first place. Sales tax nexus is essentially the practice of determining whether you are liable for taxes in a state. Different states have different ways of determining what makes you liable.
Many Ways of Defining Sales Tax Nexus
As discussed in a guide released by Avalara, there are a variety of ways that states approach sales tax nexus. From affiliate nexus laws to economic, physical presence, facilitator and more, everywhere has a slightly different approach to the way they measure sales.
This is an especially touchy subject in the 2020 landscape. First, states have gotten more accustomed to collecting under Wayfair. Second, states are desperate for money—lower revenues and increased online selling in the wake of lockdowns has made enforcement a top priority. Third, work from home orders may have thrown companies in a nexus gray area.
But what are nexus laws and how do they change the way you account for and collect sales tax? How does the shift to a work-from-home environment cause you to have decreased clarity in physical presence? We look to define each of these below.
For more on our sales tax series, check out our look at the states who have been the most aggressive, the SALT problems put on businesses as a result of lockdowns, and our look at the challenges companies are still facing. Be sure to check out part 2 discussing non-collecting seller use tax, affiliate nexus, click-through nexus, and physical presence laws.
Economic Nexus: Pass a Threshold, Pay the Tax
Prior to the landmark Wayfair case, states could only enforce sales tax obligations on businesses who had a physical presence in the state. Considered unfair to a brick-and-mortar business, who was to collect sales tax no matter where the purchaser resided, the Wayfair decision added such areas as economic nexus.
Economic nexus refers to sales tax based on activity, and generally use the following framework:
“If an online seller, even though they don’t have a presence in our state, makes more than $X in sales in our state, or conducts more than X number of transactions in our state, then they are required to collect sales tax from buyers in our state.”
40 states have implemented economic nexus laws, which generally sets a threshold based on sales revenue, transaction volume, or a combination of both. Though this differs by specific jurisdiction, this is one of the more popular yet hotly debated types of nexus passed after Wayfair.
Why? According to TaxJar, these laws were likely the reason for the Wayfair case, being knowingly contrary to the preceding Quill case. State laws on economic nexus vary. The sales thresholds vary from $10,000 to $500,000 in sales, and some states don’t have a transaction threshold at all.
For a state-by-state breakdown of how each jurisdiction is enforcing economic nexus laws, see detailed posts from TaxJar and Avalara.
Key Takeaway: Sell more than $X to residents, pay tax the following year.
Marketplace Facilitator: Burden on Third Parties Billed to You
If you sell via an online marketplace such as Amazon, Etsy, or Walmart, you’re going to need to familiarize yourself with marketplace facilitator laws. Though you will not be the one burdened with the collection and calculation, you will need to understand how you to invoice a third-party marketplace.
According to Avalara, these laws began to appear in 2017, shortly after states realized that while Amazon had started taxing sales of its own products, it wasn’t charging sales tax on third-party, or marketplace, sales. Given that more than half of all Amazon transactions occur through its marketplace, a significant portion of sales were going untaxed.
Currently, more than 30 states have adopted these laws requiring third-party marketplaces to collect and remit sales tax on behalf of sellers. For sellers, the benefit lies in having sales tax for certain transactions handled by the facilitator. But in many cases, it’s not as simple as it may seem.
If you’ve sold on the marketplace, there are a lot of complexities in billing marketplaces accurately. If you’re looking at one way sellers have been able to automate and increase accuracy when invoicing tens of thousands of invoices sent each month, our friends at MIBAR have built a solution to facilitate this process for NetSuite users. Called the Online Marketplace Fee Accounting and Payment Reconciliation for NetSuite, their product connects invoices and remittances for everything including sales tax, as well as deductions for storage fees and shipping fees.
Key Takeaway: If the Marketplace is subject to tax, they face the burden, you pay it.
Planning to Pay: Prepare for New Sales Tax Approaches
With so many different ways of approaching sales tax, states will be a bit more aggressive in the coming years. Enforcement will be a top priority for states who have seen decreasing revenues and increasing online transactions in the wake of lockdowns, making this a top priority for businesses. Stay tuned for part 2 of this series, in which we explore non-collecting seller use tax, affiliate nexus, click-through nexus, and physical presence laws.
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