E-commerce has created several tax-related issues for corporations conducting business across states without a physical footprint. This blog will discuss the sales tax implications for online businesses.
What is Sales tax?
Sales tax is collected by businesses from customers at the point of purchase. The tax is later collected by the government from the business. Sales tax rates vary in each state.
What is “Tax Nexus” or “Economic Nexus” for Sales Tax?
A business must be connected to a state in order for that business to collect sales taxes. For businesses that have a physical presence in the state, the connection is called “sales tax nexus.” Each state’s definition of “physical presence” for sales tax nexus differs slightly, but some common examples would be having an office, having a warehouse, or having employees in that state.
Economic nexus is sales tax nexus, but for online businesses. Online businesses need a different standard because they are not physically present in the state. The standard for economic nexus is that if a company makes a certain amount of sales in a state, it must collect sales tax from buyers in that state. The threshold of “amount of sales” may be a certain number of transactions or a dollar amount depending on the state.
Almost every state has adopted economic nexus laws. As of the end of 2019, Florida is one of few states that has not adopted an economic nexus law. Pending proposed legislation, the Florida Department of Revenue has found alternates ways to enforce economic nexus principles and collect sales tax from online businesses.
What Does Economic Nexus Mean for Online Sellers?
If an online retailer reaches the economic nexus threshold of a certain state, that state can pursue sales tax from the online businesses. Although the threshold varies by state, the most common threshold is $100,000 in sales or 200 transactions. However, because Florida does not have a statute, the threshold is unclear.