Choosing the appropriate business structure and why it matters.
The type of business structure you choose has a great impact on very important matters like taxation and liability. You can choose from the following:
- Sole Proprietorships
- Partnerships
- Corporations
- S Corporations
- Limited Liability Company (LLC)
Carefully research what is the best fit for your online retail business model. Each structure has its own pros and cons and makes sure you know what is right for you. Most online businesses are Limited Liability Companies as they often offer the liability protections of corporations without the personal liabilities of a partnership or sole proprietorship.
Decide what state you want to form your business.
Most new online business retailers file their documents within the state where they are physically located. This helps avoid the cost of hiring an out-of-state registered agent in your home state. However, if your business is large in scope, you might want to file your documents in Delaware. This state has advantages like laws that are generally favorable to businesses, and, unlike other states, it has a separate Court of Chancery that hears cases involving corporate law. It also does not collect corporate taxes if your Delaware Corporation actually does business in another state.
How Do I Know If I Need To Pay Sales Tax In A Given State?
To establish whether or not a state can impose a sales tax upon your business, there first needs to be a nexus. Nexus relating to state sales tax is established by a connection between the state and your business. How this connection is defined has been subject to fairly recent changes that reflect changes in the way business is conducted in modern times.
Traditionally, the nexus has been established by the business’s 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 presence as the major 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 greatly 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 make 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– A remote retailer holds a substantial interest or is 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 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 must 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 is A Tax Resale Certificate?
It is critical that you 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.
What Happens To Goods That I Do Not Sell?
You might wonder what becomes of goods you do not sell on which a sales tax has not been collected. These goods could be subject to a use tax.
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.
Getting A Tax Resale Certification Is One Of The Best Things You Can Do As An Entrepreneur
If you decide to start a business, a tax resale certificate can save you money on taxes.
In short, a tax retail certificate allows you not to pay sales tax on items that you plan to resell. This can also apply to supplies that will be used in products that you will resell, such as wood for a cabinet.
However, the process can be difficult, and the rules are different for each state. 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.