How do I find out if my business needs to collect sales tax?

To determine if your business needs to collect sales tax, you need to consider several factors related to both physical presence and economic nexus, as well as specific state requirements.

1. Physical Presence Nexus:
   • Traditionally, a business is required to collect sales tax if it has a physical presence in the state. This includes having a physical store, office, warehouse, or employees in the state. The U.S. Supreme Court case Quill Corp. v. North Dakota established that a physical presence in the state is sufficient to create a sales tax collection obligation.
2. Economic Nexus:
   • The standard for creating nexus has evolved, especially with the rise of internet sales. The U.S. Supreme Court's decision in South Dakota v. Wayfair Inc. eliminated the physical presence requirement, allowing states to require sales tax collection based on economic activity. Economic nexus is established if your business exceeds a certain threshold of sales or transactions in a state. For example, South Dakota requires sales tax collection if a business has over $100,000 in sales or 200 or more transactions in the state in the previous or current calendar year.
3. State-Specific Requirements:
   • Each state may have different thresholds and rules for economic nexus. It is important to check the specific requirements of each state where you have sales. Some states may have lower or higher thresholds than South Dakota's standard.
4. Remote Sellers:
   • If your business operates remotely (e.g., through internet sales), you may still be required to collect sales tax if you meet the economic nexus thresholds of the states where your customers are located. States have enacted legislation to address the collection of sales tax from remote sellers based on economic activity rather than physical presence.
5. Sales Tax or Use Tax:
   • Depending on your business activities and the state, you may be required to collect either sales tax or use tax. Sales tax is typically collected by sellers making retail sales into the state, while use tax may be imposed on consumers for out-of-state purchases.
6. Registration and Compliance:
   • If your business meets the nexus requirements in a state, you must register with the state's tax authority to collect and remit sales tax. Failure to register and collect sales tax can result in penalties and fines.
7. Consultation and IT Systems:
   • Given the complexity of sales tax laws and the potential for significant compliance burdens, it is advisable to consult with tax professionals or indirect tax advisers. Additionally, ensure that your IT systems are capable of handling sales tax collection and reporting requirements.

In summary, to find out if your business needs to collect sales tax, you should:

• Assess whether your business has a physical presence in any state.
• Determine if your business meets the economic nexus thresholds in states where you have sales.
• Check the specific sales tax laws and thresholds of each state.
• Register with the appropriate state tax authorities if you meet the nexus requirements.
• Consider consulting with tax professionals to ensure compliance and proper setup of your IT systems for sales tax collection.

Sources:
A Primer on Qualifying to Do Business: It’s Not About Nexus
Publication 510 (3/2023)
Sales Tax Nexus and Earnings Management
Sales Tax or Use Tax? It Matters!
Potential Taxpayer Implications of the Pending Wayfair Ruling
Publication 334 (2023)