Posts Tagged ‘tax nexus’

To Collect or Not to Collect? Understanding Sales Tax Nexus

If you sell products and services across state lines, are you liable for collecting sales taxes? The answer is more complicated than you think nowadays – and it rhymes with “Lexus.”

The concept of sales tax nexus, or whether you have a business presence in another state subjecting you to liability for sales tax collection, has evolved considerably in recent years. Once upon a time, common wisdom was that you had to have a physical, bricks-and-mortar presence in a state to create nexus. Today, there are numerous additional forms of nexus that you should be aware of.

You can thank online sales for many of these changes, in response to states losing sales tax revenue to such sales over time. Add this to the fact that nearly all sales are technically subject to state sales tax – with nexus simply shifting liability for collecting and paying these taxes to the seller – and you have a new landscape for businesses who sell on a regional or national scale.

Recent forms of sales tax nexus

Here are some of the more common new forms of nexus nowadays, as described by the Sales Tax Institute:

Click-through nexus: This normally occurs when you meet a minimum threshold of sales in another state, referred to you via the website of an affiliate in that state who receives commissions for these sales. Some state courts have held that this also extends to the “goodwill” of a brand name, such as a recent New Mexico case claiming that people shop on as a result of the presence of physical Barnes & Noble stores in the state.

Affiliate nexus: This refers to cases where you own, are owned by, or have a substantial interest in an affiliate in another state that is used to “advertise, promote, or facilitate sales to an in-state consumer.”

Marketplace nexus: This requires online marketplaces operating their business in a state – and providing services such as e-commerce, customer service, payment processing, and marketing – to collect sales taxes on behalf of their individual sellers.

Economic nexus: This is the broadest new sales tax nexus category of all: in some states, transacting more than a certain sales volume within a state may create nexus, even if your business has no physical presence or affiliate relationships in that state. This form of nexus was ushered in by the landmark 2018 Supreme Court ruling in the case South Dakota vs. Wayfair, giving any state the right to establish economic nexus.

The presence of each of these forms of nexus varies from state to state: this chart from the Sales Tax Institute outlines which states employ them, and is kept up to date as laws change, so it is well worth bookmarking. Also, be aware that these forms of nexus all exist on top of numerous previous criteria for nexus, ranging from remote employees to selling at out-of-state trade shows. This makes competent legal and accounting advice a must for determining your particular business’s situation.

How we can help with sales tax nexus

So how can businesses – particularly smaller ones – make sense of this new world of sales tax collection?

First, the bad news: you first need to determine where you have nexus, based on the particulars of your business and its sales. Only you know whether you have operations in another state, or meet any of the other conditions that create nexus. However, this is normally a straightforward process that is done once, and subsequently only evolves with changes in your business or state laws.

Next, the good news: once you have determined that you have nexus in a particular state, you can automate the process of sales and use tax calculation. And that is a very good thing, because state and local taxing jurisdictions vary widely, sometimes even within the same city or ZIP code! Our DOTS FastTax service makes life simple for you: specify an address, and we’ll give you a complete and accurate breakdown of its tax rates, including state, county, city, district, and special district rates.

FastTax uses tax data that is continuously synchronized with state and province updates, and is integrated with geolocation and our federally-certified address validation capabilities to ensure accurate location and tax results. Combined with your own good visibility on sales tax nexus issues, we can work together to make your nationwide sales process smooth, convenient, and compliant with tax regulations wherever you do business.

What the US Supreme Court Sales Tax Ruling Means for You

If you are an online retailer, your world just changed in a big way.

In a narrow 5-4 decision, the United States Supreme Court recently ruled that states now have a right to force out-of-state business to collect and pay sales taxes on sales to their customers. This means that if you do business nationally, you may soon be responsible for sales taxes in any state where you have customers. This article is a guide to how this new ruling may affect you, and what you can do about it.

Online sales tax collection: How we got here

First, let’s start with a little history.

Until recently, out-of-state sales taxes were not an issue for many businesses. According to a legal precedent set in 1992 in the Quill Corporation vs. North Dakota case, businesses were not required to collect sales taxes from out-of-state customers, unless you had a physical presence or “nexus” in that state. (Note that this only applied to collecting these taxes: consumers have always technically been responsible for paying them, albeit with a sketchy patchwork of enforcement.)

This latest Supreme Court ruling in Wayfair vs. South Dakota overturns this precedent, on the grounds that it no longer reflects the economic reality of today’s massive online retailing environment. Quarterly retail e-commerce sales have grown nearly fourfold over the last decade to just under US $125 billion per quarter in Q1 2018 (and a record $452 billion annually in 2017), while annual sales are projected to nearly double to US $638 billion between 2016 and 2022 – on the order of 20% of total retail sales.

These figures represent a lot of tax revenue for states to leave on the table, and few states want to see these revenues decline every year. And in recent years, 31 states have found loopholes for collecting these taxes anyway, by either tightening the definition of “nexus” (for example, paying commissions to referral websites in that state) or requiring documentation and reporting of large purchases. But now, the Supreme Court has cleared the way for any state to simply require sales tax collection.

How this ruling will affect your business

So what will the impact of this ruling be on you and your business? The answer is, “it depends.”

For now, everyone is waiting to see how states will respond to this new ruling. New legislation will take time to be crafted and approved. And small business may catch a break: for example, in the case at hand before the Supreme Court, South Dakota only required sales tax collection for sales volumes in excess of $100,000 or 200 transactions per year. But given how 40 states had petitioned the Supreme Court to rule in favor of this – and bricks-and-mortar businesses have railed against the unfair tax advantages of online sales – it is a safe bet that more sales tax collection with be in the future of many businesses.

Another wild card will be how states treat tax rates for out-of-state purchases. Inc Magazine points out that there are currently close to 10,000 separate taxing jurisdictions in the United States, giving one example of how sales in Chicago require the collection of four distinct taxes – a city tax, county tax, state tax, and an additional “special” tax. States may mandate the use of the same tax levies as in-state purchases, although there have also been calls to simplify out-of-state sales tax rates.

Automation to the rescue

Needless to say, this ruling promises to increase the costs and complexity of selling products across state lines. But for most businesses, the rational choice is to automate the computation of sales tax rates. Service Objects’ DOTS FastTax service provides real-time sales tax data based on your customer’s contact information. Synchronized with tax authorities nationwide, FastTax integrates address validation and geolocation to guarantee accuracy, in a world where tax rates can very from street to street.

We can’t stop the evolution of retail buying patterns and e-commerce. Nor can we control what happens with sales tax policies from here. But we can make both of these things much less frustrating, with solutions that integrate directly with your CRM or marketing automation software. Contact us today to learn how FastTax can help put much of your tax compliance on autopilot, now and in the future.

Best Practices for FastTax

Service Objects’ DOTS FastTax service is now more powerful than ever – particularly for areas that have multiple tax jurisdictions. This means that a few tweaks to your implementation can do a lot more of the sales and use tax calculation work for you. So here are some pro tips to elevate your tax game:

Determine where you have “nexus”

In order to hit the ground running, you will first want to look into your own business’ tax requirements. Often this is done by determining states where your business has sufficient physical presence to require the collection of sales tax, also known as “nexus”, and then charging the appropriate tax based on that information. After determining where you will need to charge tax, and what types of taxes are involved (such as sales or use tax), it is time to head over to our FastTax API.

Search for tax rates by address

FastTax gives you the ability to search tax rates by city and state, city, county and state, ZIP code, or (for Canadian addresses) by province. However, the current version also gives you the ability to search tax rates by address, using an operation called GetBestMatch.

To get the most out of your FastTax subscription, we recommend using this latest operation, which will take your address and return the best available tax rate match. This service will even go as far as returning a ZIP code level match when the specific address level information is not available. In addition to the city/state/county/special tax rates that are returned, we will provide you with information about the location’s unincorporated status., discussed next.

Account for unincorporated areas

If you are interested in properly accounting for areas within a city that are unincorporated, we have you covered. We offer a flag that is called IsUncorporated, and it will have either a true or false value. If the flag is set to true all you have to do is take the total tax rate and subtract off any existing city and city district rates. You will be left with the unincorporated address’ accurate tax rate.

With all of these pieces of information in hand, you will now able to select the rates that are relevant to your business and apply the specific sales and use tax rates that fit your needs.

Let us do the work for you

With the latest version of FastTax, you can harness a real-time tax rate lookup service based on contact addresses that are validated, geocoded, and then matched with a corresponding tax rate. This means that the quickest way to get accurate tax information is to now look up tax rates by address.

Compared with searching for tax rates by city, county or ZIP code, searching by address takes advantage of the deep-rooted integration between FastTax and our address validation and geocoding engines. This is particularly important because tax rates can vary within a municipality or ZIP code, based on factors such as incorporation status, so letting us validate and geocode your contact addresses helps us provide you with the most accurate tax rate data.

While the saying “garbage in, garbage out” still applies, this service will also do its best to correct your input to its proper form. Minor spelling mistakes, standardizations, or even non-deliverable addresses can sometimes be geocoded or corrected to provide you an accurate tax rate for your input address. In total, the combination of your predetermined nexus information and our tax rate lookup service allows for a quick and seamless workflow for your business.

As always, we are here to answer any questions that you may have. If you would like clarification on any aspect of our FastTax web service, please feel free to reach out to us. Our sales and support teams are here to find a solution that works for your business. And if you are a current customer and find a rate that is incorrect, shoot us an email and we will get the discrepancy addressed immediately.