The most frequently asked question we hear is, “Do I need to collect sales tax?”. Here is the quick answer. A seller should collect and remit sales tax wherever they have nexus, what they sell is taxable, their exposure is material, and there is not a state law obligating someone else to collect the tax. Let’s take a deeper look at this statement.
What is Nexus?
Nexus is just a fancy word meaning link or connection. Before a state can require a seller to collect or pay its taxes there must be some sort of link or connection between the seller and the state. There are many ways that this link or connection can be created but for FBA sellers the most common links are caused by having inventory in an FBA warehouse or by passing an economic threshold the most common of which is $100,000 or 200 transactions. It is the 200 transactions that catch most sellers. There are some who will argue that the above mentioned activities do not create nexus, but the vast majority of states do.
Now just having nexus alone does not mean a seller has to collect tax, we must look at the other factors, but if a seller does not have nexus the state can not require tax collection.
What is the role of Taxability?
Not all items are taxed the same in every state or even in every situation. For example, groceries are not taxable in many states but are taxable in some states. So if a seller sells groceries in a state that does not tax anyone on their purchase of groceries and the seller’s products meet the state definition of groceries, and that is all they sell then the seller may not have to register to collect tax. Two popular categories that have some exemptions like this are clothing and dietary supplements.
On the other hand, the taxability of what a seller sells may depend on how that product is used. For example boxes. Most states list when the purchase of a box is taxable or when it’s exempt based on a specific use. Since not all purchasers will use the box in an exempt manner a seller may be required to collect the tax or get documentation from the purchaser on how the box will be used. Another common type of sale like this are sales for resale. In general, if the correct documentation is not received from the purchaser the state will not realize the sale as an exempt sale.
Many items are taxable in every state.
What states tax rate should be charged?
When we are talking about tangible products, those items we can see, feel, taste, etc., it is the delivery state that determines the rate. The state where the product ships from will almost never have any bearing on which state’s rate to charge.
What about materiality?
Most states want sellers to collect the tax from sale number one. However, just because a state says to do something does not necessarily mean it makes good business sense to do so. We believe common sense must be applied. For example, if a seller sells 200 $5 items in a year their total sales are $1000. The tax on those sales would be in the neighborhood of $60-$85. The cost of compliance in this scenario would generally be greater than the actual tax. In this example, it would be better to wait for the state to come and find you. However, this scenario can change quite rapidly as sales increase. We believe sellers should protect themselves whenever exposure is material.
Isn’t Amazon responsible for collecting and remitting the tax?
Historically states have taken the position that the seller is responsible for collecting the tax. In January 2018 that began to change when the state of WA passed a new law requiring Amazon to start collecting sales tax. However, sellers are still responsible for any sales prior to 2018 and for the business and occupation tax (B&O).
As of this writing, Amazon is collecting in 9 states but we expect that number to increase as the year progresses. As Amazon begins collecting, sellers who sell through their own website and/or other channels may still be responsible for tax collection.
Summary
Sellers should be registered to collect tax anywhere they have nexus, what they sell is taxable, their exposure is material, and Amazon has not collected the tax. The ship to (delivery) state determines the rate to collect. If the seller does not have nexus in the ship to state then no tax need be collected. It should also be noted that how the delivery is made via the Cahoot network does NOT have any bearing on whether tax should be collected by the seller or not.
This post was authored by Mike Fleming the founder of Sales Tax and More (STM). STM is a full-service state and local tax consulting and solutions firm. Some examples of our services are consulting, research, registrations of all kinds, sales tax returns, and sales tax audit defense. We offer these services in all 50 states US territories and Canada. Our clients are located all over the world. For more information, you may visit our website www.salestaxandmore.com or email us at contact@salestaxandmore.com.