An interesting question recently came up in a meeting with a designer at San Francisco’s Fashion Incubator regarding collecting sales tax on online sales. This can be a tricky subject and you can find very different answers depending on who you ask. Below are a few questions to help you determine when and where you should be collecting sales tax.
Please use this as general information, not as legal advice. If you have any questions regarding the collection of sales tax when making online sales, please consult an attorney.
Where is your business located?
When you make an online sale, you must collect taxes in the state where your business is located. For instance, if your company is located in California and a customer located in California purchases an item from you, you need to collect taxes on that sale.
Where else do you have nexus?
The word nexus refers to sufficient physical presence in a given location. Whether or not you need to collect sales tax when making an online sale depends on whether or not nexus is created in a state. Nexus is the reason why sales tax must be collected in the state where your business is located, as mentioned previously. However, other factors can play a significant role in whether or not you have nexus. For instance, having a distribution center, employees, offices, or simply having an inventory in a state establishes sufficient nexus. This means that if you are located in New York and have a distribution center in California, all online sales made to customers who live in California require your to collect sales tax.
Do you use Amazon FBA?
If you use Amazon’s fulfillment networks through Amazon FBA, you need to verify where your inventory is located. Amazon’s fulfillment centres do create nexus, which means you might need to collect taxes in more states than you had planned.
Are any specific state laws applicable to you?
Of course, the aforementioned principles are only general guidelines. Every state has its own laws regarding sales tax. For instance, some states such as Montana and Oregon do not have sales tax at all. Sometimes, that do not collect taxes on a state level do so on a municipal level. In other cases, there might be tax exemptions on certain items such as food or clothing. You must look into state laws to make sure you are in compliance with all of them.
Moreover, many states are starting to implement what is called the “Amazon tax.” This past month, the state of Colorado has passed such a law, which requires large retailers (in this case, companies that make $100,000 and more in sales to Coloradans) to either collect taxes from their customers in Colorado or send their customers a notice every time they make a purchase to warn them that they might have to pay taxes that were not collected at the moment of purchase. Additionally, retailers must file an annual report to inform the state about the identity of their customers in Colorado as well as how much said customers have spent during the year.
More and more states are starting to implement “Amazon tax” laws, so keeping up with the latest laws regarding sales tax is absolutely essential.
How do I collect taxes?
Once you have determined in which states you need to collect sales tax, you will need to register with the different states to get a sales tax permit. Most states’ department of revenue now allow you to register your business online.
As with all Law on the Runway posts, please use this as general information, not as legal advice. If you have any questions, you may email email@example.com.