Sales tax is a problem for states around the U.S. as the online retail sector has grown to become a legal dispute between South Dakota and Wayfair. The Wayfair dispute was only resolved in 2018, meaning the sales tax nexus is misunderstood by the majority of business owners. Several myths have appeared about the nexus, including who is responsible for sales tax payments and where they need to be paid.
The nexus is one of the most misunderstood taxation practices of the last decade. The question facing business owners is, what is a nexus? The answer is simpler than you may imagine, with a nexus established in any state where you sell goods or services. A nexus is a simple way of saying your company has sold goods in a state and needs to collect taxes. Each state holds the retailer responsible for collecting taxes because they believe you have used its infrastructure to deliver your goods to your customer. Deliveries are made using the roads of a state and need to be maintained using taxes. The issue of sales taxes was limited to companies with a physical presence in a state.
I Don’t have a Physical Presence in a State
The idea that a company is only liable for sales taxes if they have a physical or economic presence in a state is no longer valid. Before the Wayfair decision of 2018, the catalog retailer, Quill fought a similar battle over its sales. The Quill case predated the arrival of the internet and did not allow taxes to be charged when a company was not physically present in a state. The companies employing agents in specific states were required to pay sales taxes.
The Wayfair decision has changed the face of sales taxation in the U.S. The Tax Advisor explains the sales tax nexus uses economic and business thresholds to determine if sales taxes need to be collected. In the majority of states, the threshold for sales tax payments by online retailers is set at $100,000, with California raising its threshold to $500,000. Several states introduced business transaction thresholds of 200 sales or more to clients in a state before sales tax requirements are met.
Nexus is Unconstitutional
Business owners across the U.S. have questioned whether a nexus is constitutional. The 14th Amendment allows Congress to determine whether a form of taxation is legal and constitutional. The Constitution states a nexus is possible when a company has met the minimum requirements in terms of financial or transaction numbers. The Supreme Court ruled on the legitimacy of economic nexus, with its ruling the basis for the legislation introduced by more than 40 states.
The Company is Responsible
Business owners set up their companies to limit personal liability for any problems that may arise. The nexus has shown there are issues with the theory that a business owner is not responsible for the sales tax problems a company could face. The laws of states differ, but most financial experts agree that a business owner, directors, and executives can be responsible for sales tax issues. Each company is responsible for its own sales tax calculations and must submit its tax filing to the state collector. If the calculations are found to be wrong, those in charge of a business face fines or jail time. If a company fails to collect the correct amount of sales tax they are responsible for making up the difference. The Blueprint gives the example of ABC Sports collecting five percent taxes from its customers for subscriptions, leaving the company on the hook for the 0.75 percent not collected from each subscriber.
Marketplaces Collect Taxes
The move to marketplace sales has allowed millions of retailers to take their online store onto the largest marketplaces. The Amazon marketplace is the largest online retailer and allows thousands of retailers to benefit from fulfillment by the company. A common nexus misconception is that marketplaces are responsible for collecting sales taxes. The sales tax nexus is proving a problem for millions of Amazon affiliates and retailers using other marketplace platforms.
In reality, it is the responsibility of each online retailer to collect sales tax from their customers. At this point, the online retailer is required to determine which area of the U.S. their customer is living in and collect the appropriate taxes. Marketplaces are not required to collect taxes on behalf of their affiliates because they are not the company making the sale. Even though Amazon is a large retailer and marketplace provider, it is not classed as the seller in the eyes of state taxation authorities.
Final Thoughts
The common misconceptions about the sales taxes nexus revolve around the failure of business owners to maintain their responsibilities for collecting taxes. The simplest way to avoid becoming involved in a series of problems with the taxation authorities is to keep accurate records and learn about sales taxes in the states your products are sold in.
