We are in the very uncomfortable position of trying to salvage our 2020 profits or at least mitigate our losses. Getting through this social distancing and business closures has put the focus on retail sales including at-the-curb facial kits, retail, and online sales. Retail sales provide a higher margin than our services, allow us to attract new clients and make more money. Win-win, right?
So, here is a big question: What about sales tax? Okay, maybe you’re thinking, “Why does my accountant feel compelled to put the brakes on all of my good ideas?”
Currently, you are charging sales tax to your local customers. You are charging sales tax to anyone you sell products to in your state. Or maybe you own a business in the handful of states that do not collect state sales tax and you think, “I’ve got this sales tax thing handled.”
If you are selling products online there are several issues related to sales tax that you should consider.
1. Is my state an origin-based or destination-based state?
2. Am I charging the correct rate?
3. Based on my sales volume, do I have economic nexus in any other state?
4. Is the volume high enough to consider deploying a sophisticated sales tax system to help me solve my nexus issues?
First things first, origin versus destination-based taxes. In the US, each state is independently governed. Unfortunately or fortunately my state laws may differ from your state laws. Until we have some sort of universal sales tax law, we follow the sales tax laws in our specific states. In an “origin-based state” (AZ, CA, IL, MS, MO, NM, OH, PA, TN, TX, UT, and VA) the sales tax rate charged is based on your “ship-from” location no matter where you are shipping to. On the flip side, in a “destination-based state”, the rate charged is based on where you are shipping to.
Next, we must calculate sales tax using the correct rates. In our state of Washington, these rates can change frequently. Each jurisdiction within our state has multiple rates; in county, out of county, in transit authority area, out of transit authority area. It can be daunting. New York state also has a very complicated jurisdictional tax code. Some services (like massage) are taxable in both New York and New Jersey but at different rates than retail sales. Even if we are not shipping product, we still need to stay on top of the changes in sales tax rates and constantly adjust our bookkeeping and point-of-sale systems.
Finally, let’s talk about nexus. The word nexus has come to mean “some kind of connection”. Lots of situations cause sales tax nexus. Up until recently, nexus for sales tax was primarily dependent on a physical presence in a state. That is, you have nexus, or a connection to that state, if your business has an office there, a sales force there, or even a shipping warehouse there. But with the June 2018 Supreme Court decision in South Dakota v Wayfair, all of that changed. Now all states can tax online sales shipped to their jurisdiction. Yes, the law now dictates that we reevaluate all online sales, even out-of-state sales, to determine if we should be collecting and remitting sales tax to those other states. How does a small business even do that? We have a few choices:
1. Ignore the law. (Not really an option, but what some of us do.)
2. Only ship in-state.
3. Track sales by state and remit to those states.
With the decision in Wayfair, online sellers face a very confusing compliance situation. Fortunately, some states really do not care if you ship an item or two every few months into their jurisdiction. California, for example, does not even bother with collecting sales tax if you ship less than $500,000 per year to the state. In most states the threshold is $100,000 per year for economic nexus. But in Kansas, every dollar earned on a shipment to Kansas is considered taxable. In some states it is the number of transactions, not the dollar amount that creates nexus with that state.
All of this can be quite overwhelming. It may even be difficult for your local CPA firm to wrap their heads around this concept as they are probably not well-versed in all 50 different states’ sales tax rules. But there are experts out there. I found a wealth of information at blog.taxjar.com. They, TaxJar, sell a software solution for online sellers and the research they have done on nexus is pretty solid. It is easy to find free information on their blog. There are other tax solutions similar to TaxJar (like Avalara, Vertex, Macola, etc.) that provide solutions if your online sales hit some of those state thresholds. Since sales tax is a now a nationwide issue, the top online retailers have built-in sales tax systems, but you still need to set these up correctly for your online store.
At Wellness Capital Management, we have a team to help you navigate the tax conundrum that online sales present. We can’t make the sales tax laws go away, but we can point you in the right direction moving forward. With clients nationwide, our bookkeepers have a solid knowledge base regarding sales tax in various states. Selling products on Amazon or Shopify creates additional questions. If you want our help, give us a call, or schedule a free initial consultation.
As always, we’re here to help.
Lisa & Monte