Remote commerce has existed in one form or another for decades. It began with mail order catalog sales, and was followed by remote shopping clubs, cable TV shopping networks and shopping infomercials, and then web-based retailers. The sales tax issues arising from remote commerce date back to the early 1990s, when states aggressively pursued companies like Lillian Vernon, Lands’ End, and Quill to collect and remit tax on sales they made from their catalogs. The U.S. Supreme Court’s ruling in a suit against Quill upheld the physical presence precedent: a state cannot impose a tax obligation on a business unless that business has a substantial connection to the state, i.e. a physical presence.
Since then, several U.S. Supreme Court cases have been settled that established the basic ground rules for when remote sellers need to register to collect sales tax, but comprehensive changes have not been legislated. There have been bills introduced in Congress to address the issue of “remote sales tax fairness,” but these have stalled in committee under pressure from the business lobby.
Now that e-commerce sales have grown to represent 8.5% of U.S. retail sales in 2017 (source: Census Bureau), states are hemorrhaging tax revenue and are tired of waiting for Congress to act. They are being very aggressive in their response. Twenty-three states have combined forces to develop and adopt the Streamlined Sales Tax Project (SSTP). States have also adopted new strategies to address the physical presence requirements, such as the “Amazon nexus rule,” which requires a company to register in any state where it has relationships with local businesses or agents and where those agents link their website to the company’s website. Finally, states have passed legislation and other administrative policies to implement rules that are classified as “economic nexus”(as explained in section “In which states do you have nexus” below).
With a growing number of states creating these economic nexus laws, and with improvements in information sharing between states, many e-commerce companies are quickly finding themselves in serious trouble with respect to their failure to collect and remit sales tax in states where they did not think they had an obligation to do so.
In which states do you have nexus?
Nexus is a binary decision; your company either has nexus in a state or it does not. Without nexus, the states’ departments of revenue cannot compel nonresident retailers to register and collect tax. Once nexus has been established, states will treat remote sellers in the same way that they treat retailers with a physical presence in their state.
This physical connection can be established directly or indirectly. Direct nexus with a state occurs when a retailer has employees living or working in the taxing state, or when the retailer has inventory or other property stored in the state. Renting real or personal property to customers in the taxing state, delivering property in company vehicles, or performing services will also create direct nexus.
In many cases, remote sellers won’t have direct nexus, but they will have indirect nexus. This occurs when the remote seller uses third-parties to perform tasks that it elects not to perform. This may include using third-party sales representatives, third-party installation companies, third-party drop shippers, fulfillment by Amazon and other similar companies. Almost all state statutes related to nexus include language that encompasses these indirect activities. The nexus created by these indirect activities is just as significant as the direct nexus creating activities.
In Alabama, the first state to adopt an economic nexus policy, the law says that if the remote seller has over $250,000 of annual sales in the state and conducts a solicitation of sales through advertising on cable television, and has any other contact with the state as described in Alabama Code Section 40-23-6, it must collect and remit tax.
So far, eight states have adopted economic nexus: Alabama, Indiana, Massachusetts, North Dakota, South Dakota, Tennessee, Vermont, and Wyoming. Other states such as Hawaii, Illinois, Maryland, Minnesota, Mississippi, Nebraska, New Mexico, Rhode Island, and Washington have considered, or are considering, the adoption of a similar policy.
Many other states have adopted affiliate and click-through nexus policies, whereby out-of-state sellers establish a substantial connection to the state through ties to in-state affiliates, or when links on an in-state business’s website generate a certain amount of business for a remote seller.
What can you do to stay in compliance?
As each state where you do business has its own nexus laws, determining where your business has nexus can be complicated and time consuming. But understanding where economic nexus exists and how policies differ from one state to the next is essential for any business that makes sales in multiple states, because you need to know how to charge tax on your online sales.
There are several tax automation services out there, such as Taxjar and Avalara, that help businesses with sales and use tax compliance. If you are interested in learning more, you can start by downloading a free guide or taking a nexus survey.
If you’re looking for help building or localizing your e-commerce website for the U.S. market, contact firstname.lastname@example.org.