In an era where online selling has exploded – from small Amazon stores to ordinary people getting rid of old sporting equipment or baby clothes via eBay – states have had to affirm their processes for the purpose of intra-state taxation. There is a formula for how states can impose a business tax on intrastate transactions. It revolves around a connection, or a “nexus,” between the business transaction and the state. Many states impose an income tax nexus if the business or the individual has substantial economic activity, or simply numerous transactions, in another state. In most cases, a physical presence is not needed for taxes to kick in.
States maintain different tax provisions that define the type of activities – and their value – that create a nexus. Often, these activities involve deriving receipts from the state, or the presence of elements such as employees or an office in the state, mobile stores, or goods stored or warehoused in the state. Interstate commerce is covered by the U.S. Constitution and also the Interstate Income Act. Some states make exceptions for small sellers, but if you’re engaging in any type of intrastate commerce, it’s important that you understand the rules. You may be surprised to find they apply to you, even if you’re not a big seller.
The Impact of SCOTUS Case South Dakota V. Wayfair
States have become more aggressive in identifying and requiring entities to comply with sales tax collection and filing rules, according to the Journal of Accountancy. Many of the new rules stem from the Supreme Court decision South Dakota v. Wayfair, Inc., which upheld South Dakota’s economic nexus law against the popular Internet-based furniture seller. While state rules vary, most of today’s economic nexus rules require out-of-state sellers to register and collect and remit sales tax once they meet a certain monetary level of sales or number of transactions within the state. This chart prepared by the Sales Tax Institute summarizes the key tenants of each state’s economic nexus rules. It’s important for businesses with an interstate sales presence to understand the rules, but it’s also critical that casual online sellers understand what their obligations are.
I Sell a Little Online. Does This Apply to Me?
You may think that because the dollar value of your transactions is low, you don’t need to worry about registering and collecting tax. But many states have limits on the number of transactions and not just the dollar value.
“In a state with a threshold of 200 transactions or $100,000 in sales, if a retailer sells 200 widgets at a dollar each, then it has to begin collecting and reporting sales tax, even though its total revenue for the state is only $200,” according to the Journal of Accountancy. “In the alternative, if it has one large sale for $90,000, then the company has no obligation to collect sales tax and file returns. The taxpayer with $200 of sales into the state might find this incongruous.”
Consult with a Tax Professional
If you’re in doubt whether the rules apply to you – or need help in following them correctly, it’s important that you consult with an accountant who can guide you through the process. DOAAR is a small business tax, bookkeeping, and consulting services firm, with an additional focus on its clients’ personal finances. Specializing in bookkeeping, controller, and CFO services, DOAAR’s offering spans daily accounting, month-end close, complex financial modeling, and oversight. From execution to analysis and strategy, DOAAR provides clients with a powerful and fully integrated back-office accounting solution. We have locations throughout California and the rest of the U.S. Visit our website for more information or to contact us.