Wtf is nexus, what does it have to do with sales tax and how much is it going to cost me? That’s what a lot of Amazon sellers are asking now that new sales tax laws have gone into effect.
They went into effect on October 1, 2019 for remote/online sellers (that’s you) and marketplace providers (that’s Amazon). The new laws only cover sales made to customers in five states, but there are dozens of states that already have sales tax requirements for remote sellers.
Are you collecting and remitting the correct amount for each state?
New Sales Tax Requirements for Online Sellers
It used to be that retailers had to have a physical presence (a.k.a. physical nexus) in a state before being required to collect and remit sales tax to that state. Sellers simply collected sales tax on transactions made where they had a physical presence and didn’t collect it anywhere else.
But the times they are a-changin’. Physical nexus is no longer the only threshold that requires businesses to collect and remit sales tax. There are now two new types of nexus you need to know about: economic and marketplace facilitator.
Understanding Nexus Types
The word “nexus” simply means connection or link. To have nexus with something means you have a connection with it.
Physical nexus means having a physical location in a particular state. If your company’s office or warehouse or taco storage site is in Hawaii, you have physical nexus in Hawaii. If you don’t have facilities in Hawaii, you don’t have physical nexus there. Your life is slightly sadder because of this.
Economic nexus means having an economic connection to a particular state. Different states have different thresholds, but the majority of them will say that if you do $100,000 in sales or 200 transactions per year, you have economic nexus there.
Marketplace facilitator nexus laws are a whole ‘nother can of worms. They require ecommerce platforms like Amazon to collect and remit sales tax on behalf of their third-party sellers. But wait! That doesn’t mean you can depend on Amazon to handle this for you. Some states still require third-party sellers to register with their Department of Revenue.
For example, Connecticut requires sellers to register with their Department of Revenue even if they sell through a marketplace that takes care of sales tax on their behalf. And Wyoming says you don’t have to register if you only sell on one sales channel, but you do have to register if you sell through multiple channels (i.e., Amazon and Shopify).
If you find this as infuriating as people who put raisins in potato salad, you’re not alone. This was all designed to make sane humans feel like doing a violence.
What Caused All These Sales Tax Changes
All these changes came about because of a 2018 U.S. Supreme Court decision in the case of South Dakota v. Wayfair. The state of South Dakota wanted to collect sales tax on products sold by Wayfair (greedy bastards), but Wayfair didn’t feel that they should have to pay it since they didn’t have a physical presence in the state. The Supreme Court ruled 5-4 that there was “economic nexus” that warranted sales tax collection.
Because of this, sellers with economic nexus in a state now must charge sales tax on sales made to customers in that state. It doesn’t matter where the seller’s office is located or where the Amazon fulfillment center is located. What matters is where the customer is located.
So if, for example, you have 200 transactions or sales of $100,000 per year to customers in South Dakota, you have to collect and remit sales tax to South Dakota. To make things more complicated, the economic thresholds vary by state.
Overview of New Sales Tax Laws by State
The five states with economic nexus laws that went into effect beginning October 1, 2019 are Arizona, Kansas, Massachusetts, Tennessee and Texas. But there are already quite a few other states with economic nexus laws.
Most states set a minimum threshold of $100,000 in sales or 200 transactions per year. But a few have set different thresholds, or even no threshold at all. Here’s a brief overview of the new states and a few outlier states:
+ Arizona – $200,000 in sales for 2019, decreasing to $150,000 in 2020, then down to $100,000 in 2021
+ California – $500,000 in sales
+ Colorado – $100,000 in sales
+ Kansas – no threshold, all remote sellers must collect state sales tax
+ Massachusetts – $100,000 in sales
+ South Dakota – $100,000 in sales or 200 transactions
+ Tennessee – $500,000 in sales
+ Texas – $500,000 in sales
Be sure to check out this complete guide to economic nexus laws by state and this guide to registration requirements for marketplace sellers.
Keep in mind that there are also local and county taxes. Yes, another layer of complexity. Texas is actually simplifying that by allowing sellers to collect a single local tax rate on all sales into the state. So instead of figuring out the local tax rate for all 1,500 districts, you would simply collect a local tax of 1.75% in addition to the state rate of 6.25%. Thanks, Texas.
Future Sales Tax Law Changes
Over 40 states now have economic nexus laws. Oklahoma is implementing economic nexus in November 2019, Louisiana is doing it in 2020 and Florida has introduced a bill to establish their own economic nexus laws.
The only other state that collects sales tax and has no economic nexus laws is Missouri. But it’s likely only a matter of time before they grab their own slice of the sales tax pie. So you might as well have your sales tax system set up now, before it gets even more complicated.
Consequences of Not Paying Sales Tax
It’s obviously getting more and more difficult to sell products online without encountering nexus laws. But it’s vital to understand (or pay someone to understand) your tax obligations. Why? Because Uncle Sam (or whatever the state equivalent of Uncle Sam is – Cousin Chad?) can come after you personally for those unpaid taxes.
This is important. Tax liabilities don’t just go away if your business goes away. Nope, you can be held personally liable for them. Hide yo kids, hide yo wife!
Plus, there will likely be penalties and interest added to the unpaid taxes. Penalties can be up to 25% of the unpaid tax total, and interest can run up indefinitely. Seriously. Get with a CPA ASAP.
With so many changes to sales tax requirements going on, businesses that sell across state lines need to be on the ball. Do you know where you have exceeded nexus thresholds? You better if you want to be sure Cousin Chad doesn’t take everything you own and leave you penniless and alone in a ditch somewhere.
But don’t freak out. If you’re a small time seller, you only have to keep track of sales in a couple of states. And if you’re a big time seller, you can afford to pay a CPA to do some nerdy magic that makes this whole thing much simpler for you.
About the Author
Gennifer is the Marketing Manager at ByteStand, where she lives and breathes customer service education while sipping coffee in her pajamas.
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