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Frequently Asked Questions
What is Nexus
For tax purposes, nexus is defined as: the minimum connection or link necessary, which allows a state to tax you or force you to collect taxes on its behalf. This minimum link can vary from state to state as well as from tax to tax. Some nexus-creating activities are obvious, others less so.
How do we determine if we have nexus?
The best way to determine if you have nexus is by making a list of all your activities in each state and then reviewing the states’ guidance for whether or not you have nexus on a tax by tax basis.
What do I do once I've determined I have nexus?
Once you have determined your nexus footprint, you would think the next step is to get registered and start collecting sales tax. But wait! Do not get registered without first determining if what you sell is taxable, and if so, if you have any past exposure. If you have never been registered, states will probably want you to pay back taxes, penalties, and interest for the past seven to 10 years, or longer. If you do have past exposure, you will want to review some options on how to mitigate your liabilities.
At what point do I register and start collecting tax?
Just because you have nexus in a state, doesn’t mean you should just panic. You should be concerned, but do some analysis of your situation to determine if and when you should start collecting the tax from your customer. Based mostly on the volume of sales you make in a given state, it may not be worth it to collect the minimal taxes in that state. This is entirely possible in some states where you sell. On the other hand, when you consider all the costs of not collecting the tax, you may find that it’s actually cheaper to start now. Here are some items to consider: Materiality — Is the level of sales into that state enough to warrant a concern about sales tax? We have a good article that discusses materiality in more detail. Past Exposure — States can go back to when you first had nexus in that state and assess you the tax you should have collected from your customers. If you’ve been in a state for many years, this has to factor into your analysis. Penalties and Interest — Typically states will assess at least a 10% penalty on late payments. Interest varies all over the board, but it accrues from day one, so it’s not unusual for interest to become very significant. Cost of Compliance — In your analysis of when you should start collecting tax, factor in how much it will cost each month to calculate the tax due on your customer invoices and then how much to fill out the monthly/quarterly/annual forms and remit the tax. The cost of this “compliance” has come down tremendously over the years, but it’s still not free. Audit Exposure — If you sell to large businesses, chances are your invoices will be seen by some auditor somewhere. If you make small sales to only individuals, the chance you will be audited for sales tax go down significantly. Remember the Biggest Tragedy in Sales Tax – Be conservative about sales tax collection. Don’t become a victim.
How do I get registered?
Great question! It’s not so impossible to get registered to collect sales tax in a state. It’s just tedious and time consuming. You can do it yourself if you have the time and patience. You go to each state’s Department of Revenue or its equivalent to find out how to get registered. The easiest way to find correct information is to Google the state DOR with the words sales tax registration and you’ll get what you’re looking for. Some states have an online registration process and some do not. In some states you may want to choose a paper registration over the online registration, because the online registration may require additional potentially unnecessary registrations. An example of an additional registration that may not be needed is a Secretary of State registration. OR, you can hire someone like PJCo to do the filings for you. Our process involves your telling us where you want to be registered, and your providing us with some required information, and our handling the rest. Our experience helps streamline the process and provides for a less stressful more efficient experience. We can usually get it done in much less total time overall, so you can begin collecting taxes quicker.
How do I report sales tax I collect to each state?
So many online sellers seem to get stuck here, or they’re making some invalid assumptions. It seems like many online sellers seem to think that somehow someone else is paying the tax over to the state governments. Amazon FBA is a really great service. Unfortunately, they end up creating nexus for online sellers who have inventory in all of the states, but once you configure the seller’s dashboard and indicate what states you want to collect tax in, then it’s pretty automatic. Amazon starts adding tax to all shipments to those states. Easy. But don’t assume that Amazon sends those taxes to the states. They don’t. They actually send it to you and it’s up to you to remit it. You remit it by filling out the appropriate forms each month or each quarter or even annually, and then sending in the indicated tax on that form. Easy, in theory. As a practical matter it’s quite the bother. Still, if you have the time and inclination, it’s something you can do on your own. If not, we suggest you talk to us about how we can take over that process for you and shockingly low prices.
How does drop-shipping work for sales tax purposes?
A drop shipment is a transaction where a seller accepts an order from a customer, then places the order with a third-party supplier – typically a manufacturer or wholesale distributor – and directs the manufacturer to ship the goods directly to the customer. The manufacturer/supplier bills the retailer for the wholesale price and the retailer then bills the customer the retail price. The state’s rules that must be followed and the tax that applies is the state where the goods are delivered to the customer – so the ship to state.
I'm an FBA Seller, someone told me we need to pay taxes in a bunch of states due to shipping products using Amazon services. Does anyone actually do this?
That is one of the most asked questions by FBA sellers. Let’s just cut right to the chase. The US Supreme Court has said that if you have more than a “slight physical presence” in a state, that state can require you to collect their sales/use taxes. So your next logical question is: Does inventory that I own, but located in an Amazon Fulfillment Center in another state constitute more than a “slight” physical presence? Do you know of any states that would turn down an opportunity to collect more taxes? Neither do we. In fact, we do not know of a state that would say that the presence of inventory in their state is not enough to give you nexus. When you have “nexus”, a state can require you to register there and collect their taxes on shipments to customers in that state.

But let’s be real. What is the real chance a state will audit you? Real answer: We don’t know. Maybe the audit risk is fairly low or even extremely low. At this writing (mid-2016), states haven’t been very active as far as we have seen in assessing taxes against FBA sellers. But states are always on the prowl looking for easy money from people who can vote them out of office. Amazon FBA sellers really make for an easy target. Reports would be easy to get showing inventory locations and sales by customer location. Being real: it would be easy for states to find you.

Let’s keep it real. Just because you have nexus, and just because it would be easy for states to find you and audit you, it may still not be worth it for you to go to all the expense and hassle to register and file sales tax returns in all these states. Yes, states have the right under our present-day US Supreme Court to require your compliance, but all that aside, it comes down to your volume of sales and your risk tolerance.

Let’s run some numbers: Let’s say you make $10,000 of sales a month, across 20 states. That’s about $500 per state. At an average rate of 8%, that’s $40 in taxes due in each state each month. Let’s say you opt not to collect the taxes because it’s such a low amount. Visit W3SchoolsNow 4 years later you get assigned a desk audit by one of those states. They add up your sales for 48 months (@ $40 p/month) and it totals $1,920 plus penalty of $192 and interest of $550. Total bill of $2,662 — for one state. Maybe not so rough. Now lets say 10 states join the party. Now you get a bill of $27,000.

That’s not so pleasant for the low volume seller. What’s the real risk? Impossible to say. But these numbers are realistic, if you are audited.

But won’t you lose some sales if you start charging sales tax? That answer, has to be “yes” also. Of course there would be some drop off. We’ve written extensively on this exact issue. But, the risk of not charging sales tax could be that you lose your whole business. And that’s just being real.

That’s why we tell people, just be careful. It’s an awfully big risk for Amazon FBA sellers to just plow ahead and not charge taxes. We’re not the nexus police. But we do want you to understand the risks and make your own informed decision.
What rates do I charge on sales?
This is a common question. In many states, if you just Google “what is the sales tax rate for X state?” The answer you get sometimes is just the state portion of the total. For example the state rate in Texas is 6.25%. But if that’s all you charged in Texas, you’d be on the hook for up to 2% local tax on everything you sell. Other states just have one single rate in the whole state or at least most of the state. Some states administer both the local and state taxes at the state level. Other states allow local cities and/or counties to administer the local taxes. Generally speaking, if you charge any tax at all, and you are shipping to another state, you charge the full state and local tax rate based on the “ship-to” location. If you are shipping from a location inside a state to another location in that state, you may have an obligation to charge tax based on the “ship-from” location. Here’s a link to a great tool for determining the rate at a particular location.
Are there some states that do not impose a sales/use tax?
Currently 45 states plus the District of Columbia impose a general sales tax. To find current sales tax rates for every state, visit our State Sales Tax Rates chart. The five states without general sales taxes are: Alaska, Delaware, Montana, New Hampshire and Oregon. However, Alaska permits local sales taxes. Delaware imposes a rental and service tax. Most of these states also impose different excise, meal or lodging taxes even though they don’t impose a general sale and use tax. New Hampshire imposes a meals and rooms (rental) tax. Montana imposes lodging facility use and sales taxes, miscellaneous telecommunications taxes, and a severance tax on oil and gas production. Oregon imposes a lodging tax and a severance tax on timber harvesting. When the states first enacted their sales taxes, the tax was imposed only on in-state sales. There was no use tax. As businesses began to offer delivery services and customers realized they could avoid sales taxes by ordering products from businesses in a different state, the complimentary use tax was enacted. Currently, every state that imposes a general sales tax also imposes a use tax. For more information on sales and use tax, visit our What is the Difference Between Sales Tax and Use Tax? In addition to the state sales and use taxes, many states permit localities to impose taxes. These include counties, cities, and districts that could include transit, water, police, school or other special purpose districts. Some examples of special purpose district taxes include stadium district taxes, hospital district taxes, and shopping mall taxes. Colorado has Ambulance, Fire Protection, and Health Assurance special purpose districts, among others. Most states collect these local taxes and distribute the collections to the municipalities. However, some states permit local administration of these taxes, which requires the taxpayer to register with the locality and remit the tax directly to it. We refer to these states as “Home Rule” states. The primary home rule states that allow local authorities to enact and administer their own general sales and use taxes are Alabama, Alaska, Arizona, Colorado and Louisiana. In most cases in these states, the locality not only separately administers the local tax, but can have different taxability rules than the state. Colorado has some of the biggest differences. Efforts are under way in Arizona and Louisiana to have the localities either follow the state or have a uniform set of rules across all the home rule authorities. Some others including Idaho and Illinois have limited home rule authorities. Many other states allow localities to enact and administer local taxes that are not general sales taxes such as meals, occupancy, amusement and telecommunication taxes. If you operate in one of the home rule states, be sure to consider not only taxability but also nexus rules. Since they are home rule authorities, you need to independently determine if you have nexus in the locality. And if you do, you must register directly with the authority. This will then require you to file tax returns with the locality. The localities also separately audit taxpayers from the state.
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