The State Sales Tax Man Commeth…maybe

Congratulations, you just opened an e-commerce business and are shipping physical goods throughout the country. Do you know who else is really excited about this? EVERY SINGLE STATE. Who knew you would be so popular so fast?!

For the tl;dr version scroll to the crib sheet at the bottom (I’m not offended, well maybe a little)

Congratulations, you just opened an e-commerce business and are shipping physical goods throughout the country. Do you know who else is really excited about this? EVERY SINGLE STATE. Who knew you would be so popular so fast?!

The truth is sales tax for tangible good e-commerce businesses in the US is a puzzle, wrapped inside a Rubix cube within a Seeing Eye poster (I do see the sailboat). So you better get cozy with one word, NEXUS.

Nexus is a fancy word tax people use to make themselves sound smart. More importantly, it means you have the pleasure of collecting and filing State and local sales taxes. Creating nexus can be both straightforward and insidiously devious. The basics of creating nexus in a given State is based on 3 P’s — People, Presence, and Product.

People

1. Employees — hiring someone in a given State (usually the same place as the corporate office) creates sales tax nexus.
2. Remote Employees — hiring a remote employee can be a great decision from a talent and payroll perspective. But having even just one employee on the payroll in a given State can create nexus.
3. Regional Sales Team Members — having local sales teams on the ground selling your product directly to customers can sound dreamy. However, if they are traveling across various State lines directly conducting sales, congratulations, you now could owe sales tax in almost every State!

Presence

1. Corporate Offices/Physical Stores — the most common form of nexus is when your company has a physical office or storefront in a certain state. This means you will have to collect/remit sales tax in that State for all sales (even if they occur online and not in the store).
2. Temporary, Out of State Business (Tradeshows/Fairs/Pop-Up Shops) — Literally, every State deals with this scenario differently. Some have dollar thresholds, others have substantive business tests and some don’t care at all. I strongly urge you to research the specific rules before setting up temporary shop (see a great State by State resource below). Generally, no nexus is created if you are going out of State for meetings or demoing products without a direct sale occurring.

Distribution

1. Warehouses (3PL Locations) — Having physical products in a warehouse (or 3PL location) creates nexus. This means having an out of State warehouse can expose all of your e-commerce sales in that State to now become taxable.
2. Fulfilled by Amazon (FBA) — FBA creates nexus in the State where Amazon is holding your inventory (often is in a different State). Getting that delicious Prime shipping for your customers can be a pain in the ass for sales tax compliance. See the reference section below for a great article illustrating how to determine the location of your FBA inventory.
3. Drop Shipping — Drop shipping creates two separate sales transactions (B2B and B2C) that can create a myriad of sales tax implications (aka a bee’s nest sitting in a bear trap). If you are engaging in a drop shipping business, please make sure you have a sound sales tax strategy and have an experienced CPA firm working closely to ensure you are following all applicable rules. I can’t stress enough how complex this business is in relation to various sales tax laws.

Don’t be scared

My goal isn’t to scare or limit your business opportunities. I want you to have a Spidey sense to know when you might be entering unplanned nexus territory and reach out to a professional for help. Collecting/remitting sales tax can become an unplanned burden when it is not part of your strategic business plan. Having a local trusted CPA firm at your disposal can help de-mystify many of these issues. If you do not have such a resource currently, I am more than available to help find someone in your area.

Resources

Here are a few resources to help you on your nexus-finding journey.

Clickable Map with Specific — State by State Sales Tax Info

Fulfilled by Amazon Sales Tax Overview

How to Find the Warehouse Location of Your FBA Inventory

Drop Shipping and Sales Tax

Good Drop Shipping Scenario Article

Sales tax software to automate compliance/filing/remitting –

• https://www.avalara.com/
• http://www.taxjar.com/
• https://taxify.co/

Crib Sheet

Nexus = Fancy word meaning you have to obtain a sales tax license and collect/remit state/local sales tax

Be aware of the 3 P’s that create Nexus — People, Presence, and Product.

People — Employees (including remote), Proxies and Employee salespeople can create nexus.

Presence — Offices, physical stores and temporarily doing business in a state via trade shows or pop-up shops can create nexus.

Product — Warehouses, FBA and drop shipment arrangements can create sales tax nexus.

Find a local CPA firm with experience in sales tax compliance to help you create a strategy to manage your sales tax

Use technology to help speed up the reporting/remittance process. This will save you from having an internal person, who doesn’t have the experience, create more exposure for your company.