If you sell only on Main Street, you must collect sales tax from your customers (assuming you sell items that are not exempt from sales tax or you aren’t in a sales tax-free state). If you sell over the Internet, your business may or may not be exposed to tax collection responsibilities beyond your state’s borders.
The U.S. Supreme Court back in 1992 said that a company’s obligation to collect sales tax depended on having a physical presence (“nexus”) within a state. Thus, if you’re located in New Jersey and sell items to customers in California, you probably don’t have to collect New Jersey or California sales tax.
But states are aggressively working to expand the boundaries of nexus because of the potential millions of dollars to be collected in sales taxes.
By legislation and court action, the types of situations viewed as a physical presence are growing. Here are some examples of expanded nexus:
• Paying commissions to marketing/sales agents
• Engaging a marketing firm
There have even been suggestions that paying an independent contractor working in another state creates a nexus to that state.
What this means to your business
The expansion of nexus, which requires e-tailers to collect sales taxes, may be a good thing for local small businesses. If e-tailers charge sales taxes to customers, then local retailers won’t easily lose business to online sellers because customers won’t save sales taxes by buying online.
For small businesses that sell nationwide, expanded sales tax responsibilities can be costly. While the customers, not the sellers, pay the sales tax, the sellers must collect the tax and remit it to the states. With over 8,000 different sales tax jurisdictions nationwide (the number results because of the differing local tax rates), collection and remittance is challenging, to say the least.
Sales taxes are revenue raisers for states and municipalities; there is no federal sales tax. However, the federal government may get into the business of monitoring state sales taxes.
There have been proposals to create national sales tax rules for purposes of uniformity and fairness. The proposals, such as the Main Street Fairness Act (which died in committee last year) would allow states to collect sales taxes even if e-tailers have no physical presence in a state. The Main Street Fairness Act died in a House committee last year. Senate Majority Whip Dick Durbin (D-IL) plans to re-introduce the bill soon. Stay tuned!