ECommerce Sales Tax - What to Know | Chris Malta's EBiz Insider Podcast

Chris Malta's EBiz Insider Podcast

Every couple of years, somebody somewhere does something that brings the idea of an Internet-wide sales tax back into the news here in the US. This naturally causes people to freak out left and right. Why? Because most people are seriously misinformed about why this might happen, how it might happen, and what effect it may have on home-based ECommerce businesses.

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EPISODE TRANSCRIPT

Quick disclaimer: I'm not a legal professional, and the information here is my personal opinion after nearly 50 years in business.

A scary rumor has been making its way around the Internet for many years now, and a lot of companies with extremely shady morals have been profiting heavily from it.

Here's the rumor. As a home-based business owner, you have to collect and pay sales tax in every state where you sell a product from the minute you start selling online.

Those shady companies I mentioned have been charging thousands of dollars for ‘systems and tools’ that are supposed to figure out and pay all those sales taxes in all 50 US states for you. The truth is, however, that you may not have to "do" that especially when you first start out.

Home-based business owners historically couldn't charge sales tax in states where they didn't reside, due to the principle of nexus.

Nexus refers to the "connection or sufficient presence" a business must have in a state for that state to impose its tax obligations on the business.

Until 2018, it was effectively illegal for a home-based business owner to charge sales tax to residents of a state in which that business owner did not have a physical presence or business license.

A home-based business owner would have had to file for a Sales Tax ID in every state in the US in order to do that. You couldn't get a Sales Tax ID in a state where you didn’t have a licensed business or any kind of physical presence.

Collecting sales tax in a state where you don’t have a license to do so was, you guessed it, illegal.

However, the legal landscape regarding nexus and sales tax collection has changed to some degree. The Supreme Court of the United States case, South Dakota v. Wayfair, Inc., decided in June 2018, brought those changes to the previous nexus rules. In this case, the court ruled that a physical presence is no longer the sole determining factor for establishing nexus.

The reason for this case being brought before the Supreme Court was that South Dakota was sick and tired of big online-only companies like Amazon, eBay and others selling products to their residents without charging sales tax and paying that sales tax to the state of South Dakota.

As a result, the Court established a new standard known as economic nexus, which considers a business's economic activity in a state as a basis for imposing tax collection responsibilities. Under this standard, even if a home-based business owner does not have a physical presence in a particular state, they may still be required to collect and remit sales tax if they meet certain economic thresholds set by that state.

These thresholds typically involve reaching a specified level of sales revenue or completing a specific number of transactions within the state.

The Wayfair decision was driven by the rise of e-commerce and the need to level the playing field between traditional brick-and-mortar retailers and online businesses. The Court recognized that modern technology allows businesses to conduct substantial economic activities in states without a physical presence. In the wake of the Wayfair ruling, unsurprisingly almost every state began falling all over themselves implementing economic nexus laws that require out-of-state businesses, including home-based businesses, to collect and remit sales tax if they meet the state's economic thresholds.

This expansion of nexus has affected home-based businesses to some degree, as they may now be subject to sales tax obligations in multiple states, again, depending on their level of economic activity.

It's important for home-based business owners to remember that Government being Government, compliance with laws in all kinds of different states other than your own can be messy.

But…do NOT buy into any of those online services who tell you that they’ll "do it all for you”.

Those people are nothing more than morally bankrupt opportunists using scare tactics to push very expensive junk software on unsuspecting business owners.

Keep in mind that first, in order to be required to pay sales tax in all 50 states, you’d have to be grossing at least 5 million dollars a year in sales.

In South Dakota, for example, economic nexus doesn't kick in until you either make over a hundred thousand dollars from South Dakota residents or complete at least 200 transaction with them in a given year.

If you learn and build this business right, you can reach those levels. So when you do get there, talk to your Accountant. They’ll have a tailored solution for you that won’t involve ripping you off for way too much money or lying to you, like the online services do.

Your Accountant will always be the person you look to in order to answer these kinds of questions and deal with these kinds of issues for you. Don’t panic and buy junk software, and don’t try to do it yourself. Work with a professional.

For much more really important information about selling online, check out my Free EBiz Insider Video Series at ChrisMalta.com.

Thanks for listening, and I'll catch you next time.