Understanding eCommerce sales tax
Boldly going where no business has gone before! With the borderless possibilities of eCommerce and the digital marketplace, those words ring true for countless businesses whose growth potential would have been a fraction of what it is today without the internet.
But increased market reach also brings increased compliance considerations. And one place businesses may not want to face so boldly is that of multi-state sales tax compliance.
What is Nexus in eCommerce
Getting your nexus 101 under the knee is the start of sales tax compliance, no matter what industry your business is part of. Nexus means a significant connection with a state. Now while it may sound simple, its implications are rather complex, especially for online sellers.
Since 2018’s South Dakota v Wayfair ruling, the sales tax landscape has become a lot more complex for eCommerce and marketplace sellers. The ruling made it possible for states to subject out-of-state sellers to sales tax regulations, meaning anyone doing business in a state could be liable to collect sales tax if they met certain requirements.
How is a nexus in eCommerce created?
A nexus is generally triggered when a business meets either of the following two criteria:
A physical presence in the state:
Actions such as renting an office, storing inventory, or employing remote teams in a state, can trigger a physical presence nexus.
Reaching the economic threshold in a state:
When a business’s total transactions cross a state’s threshold (over $100,000 in most states) or cross the minimum number of tax-free transactions (200 separate transactions in most states) an economic nexus is triggered.
But online businesses have a few additional nexus considerations to be mindful of during their compliance journey.
Nexus in eCommerce and Marketplace Sellers
eCommerce and marketplace sellers also have to monitor their online activity and be wary of the following digital-only nexus triggers:
Clickthrough nexus:
When an online seller advertises on an out-of-state business’s website, a click-through nexus can be triggered from your business in that state, even when in-state customers make purchases via the out-of-state link
Affiliate nexus:
Similar to click through nexus, if an eCommerce business has any affiliate partnerships with out-of-state brands, purchases made through the affiliate’s out-of-state link can trigger a nexus in that state.
The Impact of Marketplace Dynamics on Nexus
One of the biggest marketplace dynamics that has a huge impact on nexus is marketplace facilitator rules.
Marketplace facilitator rules place the responsibility of collecting sales tax on the facilitator of the sale (i.e. platforms such as Amazon, Etsy, and Shopify). These rules attempt to level the playing field for sellers who do not have the resources to manage compliance effectively and maximize sales tax compliance in one of the fastest growing business industries in the world.
However, different states have different definitions for “marketplace”, which leave sellers responsible for collecting sales tax in certain states and not others. This can easily leave marketplace sellers exposed to sales tax non-compliance if they are not careful.
What complicates matters even further is the fact that your nexus outside of the marketplace, which can be triggered by something as simple as where you store your inventory, still requires you to stay compliant to the states where you have a physical presence nexus. As such, it’s important to monitor your nexus and sales tax obligations on all fronts, and not rely on a marketplace facilitator to keep you compliant.
Nexus in e-Commerce challenges and best practices
The sales tax eCommerce landscape may appear more complex than other industries, with unique nexus triggers and considerations that complicate things. But at the end of the day, the major challenges are much the same:
Facing the same old challenges
The number of U.S. jurisdictions:
Retailers are often required to document transactions and prepare returns across multiple jurisdictions, making compliance particularly challenging.
Constant rate and rule changes
Everchanging updates to sales tax rules and requirements, as well as the complexity of filing correctly, make compliance difficult for retailers of all sizes.
Fortunately, the best practices that ensure compliance and protect online sellers from exposure are just as simple and straightforward as online marketplaces have made online selling:
Following the simples best practices
Keep track of your nexus:
Determine if you have nexus in a state based on their current guidelines and register, accurately track sales tax collections, and pay it to that state government based on their specific requirements.
Stay up to date with nexus law updates:
eCommerce sales tax laws are still evolving to meet the demands and growth of the digital business landscape. As such, your nexus obligations one day may not be the same the next day. Being aware of these changes will help you avoid penalties and interest charges for late or incorrect filings or payments.
Don’t leave your compliance in someone else’s hands:
Even though marketplace facilitator rules simplify the calculation and collection of sales tax for sellers in many states, they are not a foolproof compliance tool. It remains your responsibility to monitor your sales tax compliance in each state you’ve sold to.
Automated sales tax compliance with Complyt
As with all things regarding US sales tax, marketplace and eCommerce sales tax laws are unique in each state and the onus of compliance lies with the business, not the facilitators and platforms that make their business models possible.
That’s why sales tax automation software plays such a vital role in online seller’s compliance, making it easy to track and record sales across the United States, monitoring nexus in each state as your business grows.
