Sales Tax: Part 3 - Remote Sellers and Online Sales
A recent Supreme Court ruling has made significant changes to how online sales are taxed both in Tennessee and across the United States. Online sales are treated as remote sales and sales tax was previously applied only if the seller or company had a “nexus” within the state.
Nexus
A “nexus” in the sense of business is defined as the company having a core connection to the location. This was previously considered a purely physical connection, for example:
Lease or rental of tangible personal property (such as a warehouse in the state)
Ownership of real or personal property (such as a home in the state)
Employees or independent contractors present within the state
A corporate presence (i.e. offices within the state)
For example in the state of Tennessee, Amazon has been collecting sales tax on purchases since 2014 after they began opening warehouses and distribution facilities within the state, building a physical presence.
However, the new court ruling means that an economic nexus (i.e. a higher-than-threshold sales income or number of sales) within each state is now a viable and compelling reason for the state to start collecting sales tax from a company. In Tennessee specifically, this equates to any out-of-state businesses with more than $500,000 in Tennessee-based sales over a 12-month period. So if you are in Mississippi and sell this much in Tennessee, you might need to register and owe sales tax to the state.
As usual, this threshold varies in other states. For example, if you’re a Tennessee-based business who makes $100,000 in sales or 200 transactions in the states of either Wisconsin or South Dakota, you would likely start having to collect and remit Sales Tax to Wisconsin or South Dakota. This includes sales from all channels such as your website, on Etsy, and if you were to set up at a craft show. And let’s just say Kansas...well, Kansas is ANY sale. There is no threshold. So it’s important to check with the individual states that your business sells to, to calculate whether you might need to collect and remit sales tax, and how much this might be.
Tennessee was one of the first states in the country to adopt the economic nexus rule, imposing a tax collection obligation on retailers based on economic activity in the state rather than physical presence. As a state, it relies heavily on sales tax revenue to fund state government. However, this could come at the expense of small creative businesses with more accounting work needed.
Etsy
Many creatives start to sell on Etsy, the online marketplace to buy and sell handmade crafts. Fortunately, when an Etsy shopper’s delivery address is in a state that has passed a “Marketplace Sales Tax Law,” Etsy collects and remits the sales tax on the seller’s behalf. Etsy calculates the state sales tax rate for the shipping address (depending on the item and specific location), charges the buyer and then sends the tax owed to the correct state. However, due to the new ruling, the seller itself will have to be more vigilant about their sales. For example, if you made 180 sales to a state on Etsy and 50 sales from your own website, and the threshold in that state is 200 sales, you may owe sales tax to the state. So, this means that while Etsy submits the sales tax, you are responsible for both the registration and sales tax returns as needed per state!
If you’re a creative business owner who relies heavily on online or remote sales, it doesn’t have to take hours (or days!) to calculate whether you should be collecting sales tax, which states you owe to, and how much to pay. There are many resources that can integrate your website, in-person sales, and even Etsy sales in one place. We’ll be putting out a Sales Tax Guide for Creatives in the beginning of 2020.
Schedule a chat with me here to start discussing your business finances and how to manage them.