A big change that has been happening since 2020 in the business domain is in the area of sales. Remote selling has become a key aspect of expanding and maintaining operations. For B2B buyers and sellers, 90% of all transactions have become remote.
What is remote selling?
It is when marketing and sales happen through video conferencing, phone calls, or the world wide web. Prospecting, engaging, and selling- all happen with the buyer and seller being in two different physical locations.
It offers a range of advantages over traditional selling like
- Widened market/client base
- Reduced costs of travel and reduced costs of maintaining a brick-and-mortar office
- Higher turnover rate
According to McKinsey, more than 90% of B2Bs transitioned to the remote/virtual selling model. Both India and the US have had the highest effectiveness rate when it comes to such a mode of selling.
Sales tax in the US
When a sale/purchase is made in any transaction, sales tax enters the picture.
Sales tax is the amount of money that is added to the product. The US does not have a national sales tax system;it is devolved to the state level. 45 states collect sales tax and 5 states do not. Out of the 45, 38 states have an additional local sales tax as well (apart from the state sales tax). Businesses/Sellers need to collect these taxes from the consumers and remit them to the state regularly.
The five states that do not have state sales tax are Alaska, Delaware, New Hampshire, Montana, and Oregon
But how does this affect remote sellers in the US?
In 2018, the SCOTUS ruled that states can require sellers to collect and remit sales tax on sales delivered to locations within their state regardless of physical presence.
By definition, a remote seller is a seller that does not have a physical presence in a state but who sells products or services for delivery into that state.
If the sales and proceeds exceed a certain limit in that state, only then would the remote seller have to collect and remit the sales tax.(If you have a physical presence, then you are required to register in that state regardless of the amount of sales proceeds). This is called Economic Nexus and is created when a business generates a certain amount of sales in a particular state.
The level or threshold of sales depends on the state concerned- some states determine this level based on the overall dollar amount, while others consider the overall number of individual transactions completed. Some states may take into account both the dollar amount, and the number of transactions done. The threshold value could be based on gross sales, gross revenue, retail sales, or taxable sales.
A common threshold value is $100,000 or 200 completed transactions in a calendar year.
Complying with Economic Nexus
Economic nexus could potentially include a lot of paperwork if the state insists that filing be done city- and county-wise. Different tax rates in each locality might make the process more tedious. However, this is unavoidable if a business is targeting expansion and online businesses these days are inevitably selling to customers in over 20 states. Sales tax will have to be filed even if there is no liability in that period. A CFO consultancy service could help you in making the process of filing and remitting sales tax easier.
Here are a few pointers to help with compliance:
- Check the jurisdiction of sales – The US has more than 11,000 tax jurisdictions. Each has a different regulation when it comes to taxation. For example, Texas has 1,659, Montana has 1,491, and Alabama has 805 tax jurisdictions. There is no relation between the number of tax jurisdictions and complexity. States with fewer tax jurisdictions like Wyoming (24), and Ohio (96) could also be equally complex.
- Determine tax rate – Rates will depend not only on the jurisdiction but also on the product or service that is sold.
- Determining if you have nexus in a state –Nexus refers to the aforementioned threshold for each state. These thresholds are often based on the previous 12 months of activity.
- Registration, filing, and collecting – Once the threshold is crossed, registration must be done. Sales tax can be collected from the consumers only after registration is done. The requirements and the deadlines for registration are different for each state. States like Texas require the registration to be done by the 1st of the fourth month after crossing the threshold, whereas others require registration immediately upon crossing the threshold. The correct tax rate also needs to be made note of since the business should neither under-collect for the tax authority nor over-collect to the consumer’s dismay. So, it is important for the business to keep track of their sales and register to avoid non-compliance penalties.
If a seller meets the threshold but fails to register and collect sales tax, he can still use the state’s voluntary disclosure program. The seller can approach the state anonymously, pay the back taxes and interest, and begin filing sales tax returns. If this is done, the state waives the penalties.
- Keep in mind the exemptions – Some states tax digital products, some don’t, and every state has a different definition of what a digital product is. Some states do not tax government or non-profit sales. But an exemption brings the responsibility of collecting and managing the exemption certificate from the consumer/purchaser to validate why the sales tax was not collected.
Is it the same for Marketplace sellers?
Amazon, eBay, and Etsy are considered marketplace providers/facilitators. Sellers that sell using these providers are marketplace sellers.
There are a few factors that are different for marketplace sellers:
- Marketplace sellers do not need to collect or remit sales tax themselves on the sales of their products if the marketplace provider (like Amazon) has certified that they would be taking up those responsibilities.
If such a certification is not provided, then the marketplace seller will have to collect and remit like the other remote sellers (who do not use marketplace providers).
Some facilitators have in-built sales calculations that could make tax collection easier for the seller but they need to be setup and activated, possibly at an added charge.
- Storing inventory in a warehouse is a nexus-triggering event. Some businesses may use warehouses that are not owned by them to store inventory without realizing that storing in warehouses triggers economic nexus by itself in all states except for New York. Marketplace sellers need to keep track of how much inventory they have and where it is being stored in order to collect and remit tax accordingly.
- Before the 2018 SCOTUS ruling, marketplace sellers only needed to monitor the areas they had a physical tie to. But after establishing economic nexus, thresholds and sales need to be tracked for every state.
- After the introduction of Marketplace Facilitator laws, the onus of collecting and remittance is on the facilitator rather than the seller.
State-wise thresholds for remote sellers
|State||Remote Seller thresholds|
|Alabama||Sales over $250,000. No threshold on transactions|
|Alaska||Sales meet or exceed $100,000 or 200 or more transactions (no state-wide sales tax, but many local governments levy sales tax)|
|Arizona||Annual gross sales of more than $100,000|
|Arkansas||Sales meet or exceed $100,000 or 200 transactions|
|California||Total combined sales exceeding $500,000|
|Colorado||Taxable sales of more than $100,000|
|Connecticut||Sales of more than $100,000, and 200 or more retail transactions|
|Florida||Taxable sales of more than $100,000|
|Georgia||Sales equal to or more than $100,000 or 200 transactions|
|Hawaii||Gross income of more than $100,000 or 200 or more transactions|
|Idaho||Sales of more than $100,000|
|Illinois||Cumulative gross receipts of $100,000 or more, or 200 or more separate transactions|
|Indiana||Revenue exceeding $100,000, or 200 or more separate transactions|
|Iowa||$100,000 in sales|
|Kansas||$100,000 or more in sales|
|Kentucky||Gross receipts of $100,00 or 200 or more transactions|
|Louisiana||Deliver more than $100,000 worth of goods or services, or 200 or more separate transactions|
|Maine||$100,000 or more in sales|
|Maryland||Gross revenue exceeding $100,000 or 200 or more separate transactions|
|Massachusetts||Sales exceeding $100,000|
|Michigan||Sales exceeding $100,000 or 200 or more separate transactions|
|Minnesota||Retail sales of more than $100,000 or 200 or more separate retail transactions|
|Mississippi||Sales exceeding $250,000|
|Missouri||$100,000 or more in sales only|
|Nebraska||Retail sales exceeding $100,000or 200 or more separate transactions|
|Nevada||Sales greater than $100,000 or 200 or more retail sales|
|New Jersey||Sales exceeding $100,000 or 200 or more separate transactions|
|New Mexico||$100,000 or more in sales|
|New York||Sales exceeding $500,000 and more than 100 transactions|
|North Carolina||Gross sales over $100,000 or 200 or more separate transactions|
|North Dakota||Taxable sales exceeding $100,000|
|Ohio||Sales greater than $100,000 or 200 or more transactions|
|Oklahoma||Taxable sales of $100,000 or more|
|Pennsylvania||Gross sales of more than $100,000|
|Puerto Rico||$100,000 in gross sales or 200 sales transactions|
|Rhode Island||Sales of $100,000 or more or 200 or more separate transactions|
|South Carolina||Sales exceed $100,000|
|South Dakota||Sales $100,000 or more, or 200 or more separate transactions|
|Tennessee||Sales exceeding $100,000|
|Texas||Sales of $500,000 or more|
|Utah||Gross revenue of more than $100,000 or more than 200 separate transactions|
|Vermont||Sales of $100,000 or more, or 200 individual transactions|
|Virginia||More than $100,000 in gross revenue from retail sales, or 200 or more separate retail sales transactions|
|Washington||Sales $100,000 or more|
|Washington D.C||Sales of $100,000 in Washington DC or more than 200 transactions in the state.|
|West Virginia||Sales equal to or exceeding $100,000 or200 or more separate transactions|
|Wisconsin||Gross sales exceeding $100,000|
|Wyoming||Gross revenue of more than $100,000 or 200 or more separate transactions|
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