Just as e-commerce has presented challenges for sourcing sales tax, e-commerce also presents issues for sourcing income taxes. This blog will discuss the income tax implications for online businesses.
What is Income tax?
Income tax is based on the revenue of your business, unlike sales tax that is imposed on the customer at the point of purchase. Just like sales tax, income tax regulations differ by state.
How Does Income Tax Nexus Compare to Sales Tax Nexus?
Income tax nexus and sales tax nexus is essentially the same as sales tax nexus, looking at amount of sales, payroll, and property in the state when determining a business’ connection to that state. Many states have a state income tax, while other states including Florida do not. If a company meets a state’s threshold requirements for income tax nexus in that state, the company must pay income tax on income generated within that state.
State Bright-Line Economic Nexus Rules
Some examples of activities that constitute income tax nexus include:
- Providing services within the state
- Storing inventory within the state
- Accepting payment within the state
Federal law specifically outlines certain activities that do not constitute income tax nexus such as:
- Solicit sales of goods
- Offer services that are subsidiary to the sale of goods
- Display samples of a product
- Accept orders that are fulfilled out of state