December 22, 2015
This is a guest post from Mark Faggiano, Founder and CEO of TaxJar. You can reach Mark on Twitter at @taxjarmark
One of the first questions we often hear from Magento developers and merchants as they dive into sales tax is, “From which customers, exactly, do I collect sales tax?” The short answer: Collect sales tax from customers in states where you have sales tax nexus. What does that mean exactly? Well, read on.
What is “Sales Tax Nexus”?
This all started way back in 1992 with a Supreme Court case called Quill v. North Dakota. Long story short, this case – which you’ll noticed was decided before eCommerce was even a concept – made the law of the land that a merchant has to have some kind of “significant presence” in a state in order to be compelled to collect sales tax from buyers in that state.
While all states have different laws and different definitions of nexus, significant presence (i.e. nexus) generally includes:
Having an office or place of business
Having an employee
Having a warehouse
Having an affiliate
Drop shipping from a 3rd party provider
Temporarily doing physical business in a state for a limited amount of time, such as at a trade show or craft fair
In other words, as a seller, if one of your business activities creates nexus in a state then you are required to collect sales tax from buyers in that state.
Also keep in mind that you can’t really avoid “home state nexus.” If you live in a state, even if you’re only doing business from your kitchen table or your iPad, then you have nexus there.
Do you have questions about whether you have nexus or not? You can see a list of what every state considers “nexus” here.
I Have Nexus. Now What?
If you find you have nexus in a state, your next step is to register for a sales tax permit in that state. You can find here a list of states with instructions on how to register for a sales tax permit.
Most states require that you have your sales tax permit in hand before you begin collecting from buyers. One of the biggest sins in their books is to collect sales tax from buyers without holding a permit. They see this as misrepresenting that you’re collecting sales tax in the state’s name, and criminal penalties can apply. Ouch!
Make Sure You’re Collecting Sales Tax on All Channels
Once you’ve figured out where you have nexus and have registered for your sales tax permit (or permits) your next step is to make sure that you are set up to collect sales tax on all the channels on which you sell.
Check out our Sales Tax 101 Guide for Magento Sellers for more about how to set up sales tax collection through Magento.
The important thing to note here is that once you have nexus in a state, you’re on the hook to collect sales tax from ALL of your buyers in that state. So, for example, you live in Florida but say you’ve hired an employee in Illinois to man customer service for your Magento store. That employee creates Illinois nexus for you. Then you decide to sell some surplus inventory off on eBay. That inventory never even touches your Magento store. No matter. You still need to charge that Illinois customer sales tax since you have sales tax nexus in Illinois. You can learn a little more here about sales tax nexus when you sell on multiple platforms.
I hope this post has helped demystify some of the mysteries of sales tax!
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