Will The Economic Tax Nexus Affect Your Small Business?
Last year, some major changes occurred for Small Business in the United States during a court ruling in the 2018 South Dakota v. Wayfair, Inc. case. This effectively allowed states to make up their own rules in terms of "sales tax" needing to be collected. It's a big change for Online Small Businesses selling products / services, but it seems that many people aren't even aware this happened.
Let me preface by saying, I'm not an expert on tax laws. Information here is just meant to bring awareness and open up some discussion. You'll need to do your own research to see how these laws or other tax laws apply to your business.
THEN (Physical Presence Nexus)
Anyone doing business in the United States should be familiar with having to pay sales taxes to YOUR state. For the most part, sales tax laws were pretty simple if you were a sole proprieter (ie. "one man band") doing business online.
- If your customer was out of state, you didn't collect sales tax.
- If your customer was in-state, you collected sales tax.
Sales tax is then submitted to your State on a quarterly, semi-annually or annually schedule.
This is how a ton of small business owners have operated for the last 20+ years with selling on the internet. And states haven't been happy losing the revenue.
Now, if you want to get a bit more technical, the Physical Presence Nexus could still mean under certain conditions you had to collect and remit sales taxes to other states, outside of the state you live in. Say, if you had buildings, a warehouse, or other employees in different states. In that case, you have what qualifies as "physical presence" in additional states and you're supposed to sign up with the Dept of Revenue to collect and remit sales taxes for each state you trigger a sales tax nexus in.
2018 South Dakota v. Wayfair, Inc.
In June 21, 2018 the Surpreme Court of the United States ruled in favor of South Dakota being able to tax remote sales. This ruling has changed EVERYTHING about selling products/services online in the United States.
You can read up on it at the two links below or type "economic nexus" in Google:
- https://blog.taxjar.com/economic-nexus-laws/
- https://www.avalara.com/us/en/learn/sales-tax/south-dakota-wayfair.html
What it boils down to is this. States can make up their own rules for when remote sellers (that means you or me) hit a threshold that triggers the need to collect sales taxes for that state.
NOW (Economic Nexus)
Now that we're also operating under "Economic Nexus Laws", navigating sales tax collection is even more cumbersome.
Many states have been adopting something similar to South Dakota's thresholds..
- More than $100,000 in gross sales
-OR- - 200 or more separate transactions
That first trigger isn't bad. It's that 2nd trigger that's the problem.
Each state can set their own rules and change them at any time. Along with a variety of other nexuses that have been implemented over the years, this makes navigating sales taxes as a small business incredibly complicated (as if they weren't enough already in some situations).
For some more info on each individual state's nexuses and thresholds, check out the Avalara's Map.
What's this affect? Pretty much everything being sold online. Digital products. Physical products. Online services. If it creates a transaction in Paypal or other type of payment gateway or online marketplace (ie. eBay, Amazon, etc) or direct sales from a website for a product/service, then odds are it would count as a transaction.
And the rabbit hole truly does go deeper.
It's not just that you have to worry about this at a state level. Colorodo assesses a state-level tax, as well as tax on 220 local jurisdictions, which make submitting sales taxes for that state INCREDIBLY COMPLICATED.
There's Marketplace Facilitator laws hitting larger marketplaces like Ebay/Amazon where they're starting to collect for some states, which is great, except there's many states they don't collect for. You're still responsible determining if you've hit thresholds for other states. And if you sell on other websites/venues where sales tax isn't collected, you may still trigger nexuses.
Some day this is all likely to change and become much easier, but right now it's a complicated mess.
Should You Be Concerned?
As an affiliate marketer, if you're just making a commission from affiliate programs, sales tax is already collected for you because it's the affiliate program's customer. If that's all you're doing, then it's likely not going to affect you at all.
Here's the thing though..
Quite a few affiliate marketers are also creating eBooks, online courses, or they're selling on Amazon FBA, or have a drop-shipping website, or a website selling other products.
If you're selling products/services on your website or another venue & you're doing a considerable volume or dollar amount in sales, you're going to want to talk to a CPA or research this a bit more yourself determine what your exposure is.
The problem is this..
- If you ignore all of this & at some point you get a letter in the mail from a state asking for sales data, you're going to owe not only the sales tax that wasn't paid, but also a penalties/interest.
- If you proactively start submitting applications to remit sales taxes in different states (before you hit thresholds), then you're definitely on their radar and now have to file returns on a schedule until they tell you otherwise (even if you had ZERO sales for a year).
Think you're immune? Every transaction has a record. If you do business through Paypal, eBay, Amazon or any other payment gateway / marketplace, states can request information on any sellers.
It's likely they're targeting larger dollar volume sellers at this point, but it's anyone's guess how far each individual state is willing to go to attempt to collect sales tax. States have already requested seller information from Amazon and eBay. Some folks have already received letters in the mail.
Note: From my understanding, this DOES affect international sellers selling to U.S. customers (ie. Amazon FBA sellers located in a different country, shipping products to Amazon warehouses that are sold to U.S. customers), however it is less likely to be enforced in terms of collecting taxes from overseas vendors & more likely accounts will just be suspended/removed from marketplaces if not complying properly.
Aren't They Just Going After The Big Guy?
I've been a member of Sales Tax for eCommerce Sellers Facebook Group for the last year. As changes have rolled out and new members have joined (now over 10,000 members), there's been discussionf rom Amazon FBA sellers mentioning they've received letters in the mail. The letters notify them t hey've been identified as owing sales taxes and asking for sales data for 2017 and 2018. This happened because Amazon had to comply with state requests for seller information.
Are states just looking at businessses over $200k/yr right now? Or $100k? Or $50k? It's anyone's guess. Even if they are only looking at six-figure numbers, at some point they could decide to look at businesses making 5-figures or less if it's worth their time. And I've experienced a state sending out notices to collect pretty small dollar amounts, so nothing would really surprise me. After all, the only cost is a letter, an envelope and a stamp.
In terms of what's worth their time, here's what stands out to me..
States could all easily have adopted a $100,000 gross sales AND 200 transactions policy so that only very large businesses would be affected.
Instead, many of them went with the $100,000 OR 200 transaction policy.
The "OR" makes a big difference, because setting a transaction volume that low as one of the triggers immediately puts MANY very small eBay businesses or online shops at risk for meeting those transaction thresholds. It almost encompasses ALL businesses online selling products/services. That's a pretty BROAD move.
If those states didn't think it was worth their time to process all the paperwork, emails, phone calls, sign-ups, etc from people that only owed $10-30 in sales tax to the state, you'd think they wouldn't have adopted such a low transaction threshold from the start.
So What? Just Pay The Sales Taxes!
This isn't about the idea of avoiding collecting or paying sales taxes. It's the overhead.
Even if going through a software service like Tax Jar or Avalara, what happens behind the scenes still amounts to individual sign-ups for submitting sales taxes to states with individual payment schedules (quarterly, semi-annual, annual) and all the correspondence that entails. And these services aren't cheap, usually requiring a separate fee for each state being submitted.
You can leave it to a CPA to figure out, but there will again be costs per state and often the correspondence from those states, along with the task of remitting payments, will still be up to you.
It's basically opening Pandora's Box with where things are at right now, especially if you're hitting transaction thresholds in *MANY* states. With the transaction thresholds being so ridiculously low, even smaller eBay sellers or sellers of digital products can start triggering nexus for some states rather easily.
Once you trigger a nexus and sign up to submit sales taxes for a state, you're on the hook for remitting sales tax to their Dept of Revenue website until they say otherwise (even if the next year you sold zero dollars to that state).
Small Business Is Changing
These laws are a problem for small businesses. Especially the under $50k or under $100k single person business that depended on any sort of volume from physical/digital product sales or services.
Hopefully the problem is solved in the future by marketplace websites, payment gateways, etc facilitiating the remittance of sales taxes and taking the burden off of smaller businesses. The question is, how long will that take?
Unti then, small businesses that do enough volume to hit Economic Nexus thresholds just have the choice of either ignoring it all (creating a large liability in the process), finding a way to limit their exposure (ie. throttling transactions to stay below threshold limits) or opening up Pandora's Box as they start submitting sales taxes to additional states.
That's a tough spot to be in.
Comments? Have the Economic Nexus Laws affected your online business?
Let me know below!
Recent Comments
2
As affiliate marketers, we do not have to worry about sales tax nor shipping issues. We simply earn commissions on sales.
That said, I live and work in Colorado. Some of my friends that actively sell online have talked about it. It does very much affect business owners and people that are making money with their crafts etc. online.
It will likely discourage some people from selling their merchandise online.
With my small brick and mortar retail shop, I have opted to NOT sell anything online. The headaches of worrying about sales tax in other areas is not worth it.
These rules will possibly open the door for businesses, like Amazon, Ebay, and others that can provide a program that calculates the appropriate amounts of sales tax and remits it on behalf of the vendors to the proper authorities.
Sondra, thank you for your response! I agree, affiliate marketing commissions wouldn't fall under the Economic Nexus Laws. That's been the main reason I've been working on concentrating more efforts on affiliate marketing and throttling sales of physical products online.
I think this affects many more people than who realize it. I'm very surprised there isn't more discussion on this, but it's a bit complicated even for CPA's at this point with how much keeps changing.
I've seen people mention this should be handled at the Federal level, but we really are a "United States" and each state can make up it's own rules. So I think it's going to take some further agreements between the states to really simplify anything and that's not bound to happen for a while.
The only other solution, as you mentioned, is for the marketplaces to handle paying sales tax. I know they're starting to roll that out with Marketplace Facilitator taxes, but it's going to take all the states forcing marketplaces to collect sales tax and/or payment gateways to implement something that automatically collects sales taxes. As it is right now, there's attempts at simplification, but it still just looks like a mess.
Hopefully in another 1-2 years it's easier. In the mean-time, I'm going to look at it like a forced way to learn how to make affiliate marketing work :)