Sales and Use Tax: Technology and the Evolving Definition of Sales Tax Nexus
States across the U.S. are challenging the physical presence standard that has so long been a leading factor when determining sales nexus in states and local jurisdictions. Why are they challenging it? Blame the Internet and technology.
The Driving Force Behind a New Definition of Sales Nexus
As more goods and services are sold and delivered via the Internet, states have determined they are potentially losing billions of dollars in sales tax revenues. It’s not just Internet retailers, such as Amazon, Etsy, and eBay, that are taking a chunk from state revenue totals. It’s also digital goods and software as a service (“SaaS”), which can be bought via the Internet and accessed via cloud technology.
Between the popularity of Internet retailers and advances in technology, businesses can sell their goods and services across state lines without ever having to set foot in that state. While these changes may be great for businesses and retailers, states and local jurisdictions are losing a lot of money from sales and use taxes that aren’t being collected on all those Internet sales.
The law in many jurisdictions puts the onus of reporting sales tax on the consumer in the form of a use tax. However, consumers are often unaware that they are supposed to self-report use tax for online purchases or they choose not to do it.
Expanding Physical Presence
States are fighting back now by passing laws that redefine sales nexus in their jurisdictions. Rather than relying on traditional physical presence standards, states are determining nexus by other measurements, the most common of which are affiliate nexus, click-through nexus and economic nexus.
States have pursued legislation requiring remote sellers to collect sales tax if they have an affiliate or subsidiary relationship with a business in their jurisdiction. For example, if an ecommerce site running out of Virginia is affiliated with a brick-and-mortar business in Maryland, they may need to collect sales tax in Maryland as well.
Sometimes referred to as “Amazon laws,” these laws attempt to establish nexus for out-of-state businesses that use an in-state advertiser to target consumers across state lines via click-through banners or links placed on that advertiser’s website. States imposing this standard claim intentionally targeting consumers across state lines establishes nexus. Many of these laws include some sort of threshold or requirement that the in-state company be compensated on a per-click or per-sale basis in order for nexus to be asserted.
For example, take the case of a Florida business that advertises on the website of a Georgia company. If the advertisement includes a link to the Florida business’s website, Georgia will require the Florida company to collect Georgia sales tax if the Georgia company receives payment based on the number of times a visitor to their site either clicks through to the Florida company’s site or based on purchases made as a result of these click-throughs.
Some states are basing nexus on the volume of business done, usually measured in dollar amounts or number of transactions. For example, Alabama states that if an out-of-state retailer engages in one of several types of activities (including advertising on the Internet) and exceeded $250,000 in annual sales to Alabama customers during the previous calendar year, that retailer has nexus and is required to collect, report, and pay sales tax to Alabama. Other states have chosen to mandate that businesses achieve nexus based on whether or not one of two things happens: the business’s sales of tangible personal property or services exceed a specific dollar threshold (such as $100,000, for example), or the business conducts a specific number of separate transactions in the state.
Notice and Reporting Laws
As an alternative to, or sometimes in addition to, establishing new definitions of sales tax nexus, some states have instituted notice and reporting laws. These states generally require businesses that do not collect sales tax to notify consumers that they may be obligated to pay use tax. Some of these states also require the businesses to provide a report to in-state customers and/or the state taxing authority regarding the dollar amount of customers’ transactions. These kinds of laws alert consumers that they are required to report and pay use tax. They also make it easier for states to collect the tax.
The specific challenges to businesses that sell goods and services across states lines are:
- The patchwork of sales tax nexus laws can be difficult to comply with (many businesses lack the systems and processes to handle this load);
- Collecting, reporting and paying sales tax across so many jurisdictions can be hard to keep straight (with over 7000 state and local taxing jurisdictions in the U.S., this can cause a real accounting headache);
- Staying abreast of changing sales and use tax laws in all 50 states is a logistical challenge.
A free webinar with more in-depth information about the evolving definition of sales tax nexus and the standards being applied by different states is being presented on Thursday, June 22, 2017. Register for the webinar, “What?! I Have to Collect Sales Tax?” today to join the discussion and get more detailed information.
If you want to have your own in-depth conversation about what the changing landscape of sales and use tax laws means for your business specifically, reach out to sales and use tax experts Bill Poad, Director, and Kathleen Holston, CPA, Senior Manager, to start the conversation. These professionals on the State and Local Tax (“SALT”) team can help you evaluate your current situation and make recommendations to guide you forward.
The SALT team can also work in conjunction with our Technology Solutions team, if you want a better technology solution to collecting, tracking, reporting, and paying sales taxes across multiple jurisdictions – something that can integrate with your current systems.
Start the conversation today. If you get even one new idea from it, it will have been worth your time.