Did you know there are only five states that don’t collect state-wide sales tax? Known as the NOMAD states (New Hampshire, Oregon, Montana, Alaska, and Delaware), these states rely more on property or income taxes in order to generate the revenue sales tax normally would.
Modern sales tax obligations go beyond NOMAD states, and your business may owe more than expected. Key factors include nexus types, taxability rules, and best practices for managing changing obligations.
Understanding Your Sales Tax Nexus
Nexus is the determining factor for whether a business must collect and remit sales tax in a state. Each state has its own criteria, and businesses must track where they establish nexus to stay compliant.
Categories of Nexus
Physical Nexus
A business establishes physical nexus in a state through various means, including:
- Property – Owning or renting offices or warehouses
- Staff – Employing in-person, remote, or independent contractors
- Inventory – Storing goods in third-party fulfillment centers
- Service – Delivering, installing, or repairing products
- Trade Shows – Conducting one-time or annual business operations
Economic Nexus
Economic nexus is triggered when a business meets certain sales thresholds in a state, such as:
- Sales Revenue – Typically $100,000 or more annually
- Number of Transactions – Usually 200 or more annually
Affiliate Nexus
Also called click-through nexus, this occurs when businesses generate sales through in-state affiliates or partners, including:
- Partner Agreements – In-state affiliates promoting products or services
- Referrals – Purchases made via affiliate links or advertisements
- Sales Thresholds – Gross receipts from referral sales reaching state-specific limits
Marketplace Facilitators
Platforms like Amazon and Etsy collect and remit sales tax on behalf of sellers when nexus is established. Marketplace sales compliance is simpler, but businesses must still handle sales tax for non-marketplace sales in nexus states.
Taxability and Sales Tax Obligations
Beyond nexus, taxability—whether your products or services are subject to sales tax—varies by state and affects your obligations. While sales tax generally applies to tangible goods and some services, taxability rules can be complex.
Taxable vs. Non-taxable
- Taxable Items: Physical goods like clothing, electronics, and furniture are usually taxed, as are some services like data processing and telecommunications, depending on state rules.
- Non-taxable Items: Most services are generally exempt unless they are explicitly listed as taxable. However, some services may become taxable when they are bundled with a product, therefore making the entire transaction taxable based on the true object test.
Industry-Specific Tax Exemptions
- Manufacturing Exemptions: Many states exempt manufacturing equipment and materials from sales tax to cut costs and boost local production.
- Additional Industry Exemptions: Specific industries—including agriculture, energy, and biotechnology—may also be exempt from sales tax to promote economic growth in specific states.
Digital Products and Services
- Digital Goods: Intangible products—such as ebooks, digital music and movies, and streaming services—may be subject to sales tax, depending on whether an individual state classifies them as a product or service.
- Software: Different types of software are typically taxed in different ways:
- Prewritten Software: As it is generally sold on physical media or downloaded on a device, prewritten software is often considered tangible and can therefore be considered taxable.
- Custom Software: When designed and developed for a specific buyer, custom software is typically considered to be exempt unless it is sold to someone other than the original buyer.
- Software-as-a-Service (SaaS): Subscription-based applications that do not require users to install, update, or maintain software on their devices vary from state to state in terms of definition and, therefore, taxability.
B2B vs. B2C
- B2B Transactions: Sales between businesses are usually taxable unless the buyer provides a resale certificate for tax exemption.
- B2C Transactions: Sales made from a business to a consumer are generally taxable, depending on how the state deems the product or service.
Sales Tax Collection and Compliance
After identifying your nexus and taxable products or services, you may need to collect and remit sales tax in multiple states. Let’s go over how to get started, including registering, setting up your systems, and staying compliant.
- Gather Documentation: Collect required state-specific details like EIN, location, business type, and projected sales volume for your sales tax permit application.
- Complete Registration: Apply through the state revenue department or tax commission. Online submissions are faster, and approved permits may need to be displayed per state requirements.
Setting Up Sales Tax Systems
- Jurisdictional Variables: Within some states, different jurisdictions have the option of imposing additional taxes on top of state sales tax, so make sure that you are aware of what is taxable within the state as well as any additional tax rates based on jurisdiction.
- Sales Tax Integration: Update your sales platform or point-of-sale system to calculate and collect sales tax for states in which you have now achieved nexus and on products or services that are considered taxable in those states.
- Most tax software can automate these calculations, reducing errors and ensuring accurate documentation for business tax filings and potential audits.
Maintaining Sales Tax Compliance
- Know Your Nexus: Monitor your sales to be aware of when you are approaching any changes to your nexus so you can prepare accordingly.
- Regular Remittance: To avoid any financial or legal penalties, be sure that you are remitting collected sales tax on the predefined schedule set by each state.
- Timely Taxes: Whether monthly, quarterly, or annually, ensure that you are providing accurate reporting of what you collected when filing all state sales tax returns.
- Legislation Updates: Regularly check state department of revenue websites for policy changes and updates that may impact your nexus status.
- Industry Reports: Stay updated with annual reports from trusted tax experts to understand emerging trends and compliance requirements.
Common Sales Tax Scenarios and Solutions
Different business models have unique sales tax obligations. Let’s explore common challenges and practical solutions to overcome them.
Sales Tax for Ecommerce Businesses
Ecommerce businesses frequently sell across state lines, making economic nexus a key factor in their complex sales tax obligations.
- Monitor Economic Nexus: Track your sales revenue and transaction counts in each state. Most states have thresholds of $100,000 in sales or 200 transactions, but always verify the specific requirements for each state where you sell.
- Sales Tax Software: Integrate sales tax software with your e-commerce platform to automate calculations, collection, and reporting based on nexus and taxability.
- Address Validation: Use validation tools to ensure accurate sales tax calculations based on buyers' locations and jurisdictional tax rates.
- Marketplace Facilitator Laws: If you sell on platforms like Amazon or Etsy, they handle sales tax collection, but you must track obligations for other sales channels to keep accurate records.
Sales Tax for Remote Sellers
Remote sellers often establish economic or affiliate nexus through online advertising and direct mail, depending on their business activities.
- Economic Nexus: Regularly assess if you have triggered economic nexus in different states based on your sales activities and their individual thresholds.
- Affiliate Nexus: Also be aware of click-through nexus laws where affiliate marketing activities can create a sales tax obligation in some states.
- Remote Employees: Depending on their classification, remote employees may create physical nexus in their state
- State Registration: If you establish nexus in a state, promptly register for a sales tax permit with the state's revenue department or tax commission.
Sales Tax for Service-Based Businesses
While often tax-exempt, service-based businesses may face tax liability challenges, especially when bundled with products, as state rules vary.
- Taxability Research: Conduct thorough research on the taxability of your specific services in every state where you operate or provide services via remote employees.
- True Object Test: If you bundle services with taxable products, understand how the true object test may determine whether the entire transaction can become taxable.
- Service Location: Determine the specific location where the service is performed, as this can often impact not only state sales tax but also jurisdictional taxes.
- Exemption Certificates: Though less common, if your services can be resold by another business, that B2B purchase can be tax exempt if the buyer has a resale certificate.
Sales Tax for Hybrid Businesses
Hybrid businesses, combining physical, remote, eCommerce, and service models, face complex and ever-changing sales tax obligations.
- Comprehensive Nexus Assessment: Evaluate all potential nexus qualifiers, including physical (office, inventory storage), economic (remote staff, online sales), and affiliate.
- Segmented Sales Tax Tracking: Implement ways of tracking sales tax obligations separately for each aspect of your business to ensure compliance and accurate reporting.
- Multistate Strategy: Create a detailed strategy tailored to each state's specific requirements where you have or are nearing nexus.
- Consider Consulting: A sales tax professional or CPA specializing in complex sales tax requirements can help ensure accuracy and prevent costly mistakes.
Do You Need to Collect Sales Tax? We Can Help!
Many factors impact sales tax collection, but understanding nexus, taxability, and compliance is key to success. If managing sales tax feels overwhelming, The Sales Tax People can help. Schedule a free call today and let us handle your sales tax obligations so your business can thrive.
