If you are a small to medium sized retailer, and you are concerned about your obligations for collecting sales taxes, this article will help you sort through your potential collection obligations so you can confidently address the complexity and expense of collecting for multiple states with differing collection requirements.
Where do I have to collect sales taxes?
This has always been a very difficult question, but thankfully it may be getting a little clearer.
Physical Presence- the standard has traditionally been that a retailer is required to collect sales tax for sales made into any state where the retailer has a physical presence. It is not always easy to know if you have a legal presence in a state as state definitions of a physical presence are not consistent. Obviously, a retail outlet in a state creates a physical presence (or nexus in tax terminology). This presence can also be created by making deliveries, doing installations or repairs, or having inventory or payroll in a state.
The 24 states that are part of the Streamlined Sales and Use Tax Agreement (List of Streamlined States) have all adopted a uniform standard for what constitutes a physical presence for the purposes of making collection services free for remote merchants. (Explanation of Streamlined Services). These services include audit support. Other states offer online guidance on what activities can create this collection obligation.
Economic Nexus- with the U.S. Supreme Court decision in Wayfair states can now compel the collection of sales taxes from retailers that have sufficient economic activity (sales delivered to residents of that state). Individual states set the level of economic activity, by the dollar volume of sales or the number of transactions, that triggers a collection obligation. For additional information on economic nexus go to Economic Nexus and Your Business. You can view the collection obligation thresholds for each state here (TaxCloud State Guides). Many states have adopted the same guidelines.
No Presence- In a state where you don’t have a physical presence and you are below the economic nexus threshold; you are not required to collect sales taxes on sales delivered into that state. Keep in mind that your customers are likely to have a legal requirement to self-pay taxes owed on their purchases if you don’t collect them. Also, just because you don’t have a legal requirement to charge sales tax, it can be worthwhile to do so. The states in the Streamlined Sales Tax Agreement and Pennsylvania will pay TaxCloud to manage you sales tax collections so that it is free to you. Yes, free. TaxCloud offers pricing incentives to retailers that collect for all these states. Our services are available in all states that have a sales tax.