How Do I Know If I Need To Pay Sales Tax In A Given State?
There first needs to be nexus to establish whether or not a state can impose a sales tax upon your business. Nexus relating to state sales tax is found by a connection between the state and your business. How this connection is defined has been subject to pretty recent changes that reflect changes in the way business is conducted in modern times.
Traditionally, the nexus has been established by the business having a physical presence in the state. However, due to the explosion of e-commerce, physical presence within a state is no longer a requirement for sales tax nexus. In the case of South Dakota v. Wayfair, the courts eliminated physical reality as the significant requirement for creating nexus. It still should be noted that physical presence is considered an important requirement to allow a state to collect sales tax and is still one of the first considerations for sales tax.
What Are The Different Methods In Which The States Establish Sales Tax Nexus?
The definition of sales nexus can vary significantly from state to state. Here is a list of the different ways in which states can determine sales tax nexus:
- Click-Through Nexus legislation
- Affiliate Nexus legislation
- Marketplace Nexus legislation
- Notice and Reporting Requirements
- Economic Nexus
Click-Through Nexus legislation- This usually requires a remote seller to meet a minimum sales requirement in the state resulting from an in-state referral agent who is a resident of the state. The agent must be making commission payments to the referral agent for any sales that are the result of the click-through referrals from the agent’s website.
Affiliate Nexus legislation– Remote retailers hold a substantial interest or are owned by a retailer that is located within the state and sells a similar type of product under a similar business name. Instate retailers can also be used to promote or market the product to in-state customers. Affiliate nexus does not require common ownership and may not include services such as sales and delivery.
Marketplace Nexus legislation– This definition applies to marketplace facilitators who operate a business in the state and provide e-commerce infrastructure, customer service, payment processing, and marketing services to individual sellers. The facilitator is the one that is required to register with the state and collect the sales tax rather than the individual sellers.
Notice and Reporting Requirements– This legislation requires that a retailer does not collect the state sales tax themselves but notify their buyers that they must report state use tax on all their purchases. The retailer might be required to send the purchaser a statement of all their purchases.
Economic Nexus- An out-of-state retailer generally is required to collect and remit sales tax once the retailer meets a set level of sales transactions or gross receipts activity (a threshold) within the state. No physical presence is required.
To find out more about state sales tax please visit the sales tax institute.
What Happens If I Do Most Of My Business In A State That I Am Not Incorporated?
If you primarily do business in a state that you are not incorporated in, make sure you apply for a Foreign Qualification (also known in some states as a Certificate of Registration or Certificate of Authority). This is the process of registering your company, which is considered domestic to the state in which it was originally formed and foreign to all other states, as a foreign entity in the states in which it operates. The retailer is then able to legally conduct business outside the state in which the company was originally formed and therefore should be able to apply for a tax resale certificate.
Remember To Verify Any Tax Resale Certificate Presented To You
In the first part of our series, we mentioned that a vendor can refuse a tax resale certificate. This is because the vendor will be the one liable to the state government should anything be remiss. That is why you should always take the following steps to assure that anything presented to you is valid.
- Make certain that the certificate is properly filled out and signed by the business owner
- You should be able to verify the certificate online by using the certificate
- You should also be able to verify online if the certificate has expired
- Be aware of purchase that seems suspicious and does not relate to the customer’s business in a logical manner
- You must keep the certificate on file for at least 5 years in case of a tax audit.
What is A Tax Resale Certificate?
You must understand that tax resale certificates can also be used on items that will be resold. Office supplies, such as new computers for your employees, would not fall under the category of retail. It would be considered fraud not to pay sales tax on these items.
If this is confusing for you, just think of tax resale certificates as state tax exemption certificates. Some states call them exemption certificates or reseller’s permits.
Is The Tax Resale Certificate The Same As A Seller’s Permit?
Even though tax resale certificates are called reseller’s permits in some states, it is important not to confuse them with seller’s permits. A seller’s permit allows a retailer to charge tax on items that they are going to sell to a customer. A tax resale certificate allows you to buy items that are intended for resale without paying a sales tax on those items.
Does A Vendor Have To Accept My Tax Resale Certificate?
It is extremely important to a retailer’s bottom line that they do not pay sales taxes on goods if there is a possibility that the tax can be exempted on a state level. However, it is also crucial to understand that a wholesaler is not required to accept your tax resale certificate in some states.
Do Not Get Frustrated.
We understand that this is a whirlwind of information that can be very frustrating. There are great differences between states and you do not have the time to sort this out and properly run your business. That is why TaxResaleCertificate should do all the hard work for you. We can make sure that you get all the advantages of a tax resale certificate without having to deal with the hassle of government red tape. Let us handle the hard stuff so you can proceed to run your business with confidence. Make sure you check out our second blog in this series so you can learn even more valuable information about tax resale certificates.