What Remote Sellers Need to Know About U.S. Sales Tax
Preface: Sales tax is levied on most tangible products and certain services. Levied on the end user or end consumer.
Historical Background on Sales Tax Reform
Before Sales Tax Reform, a seller must have a “taxable nexus?in a state before the state can require the seller to collect and remit sales and use tax. Therefore, remote sellers should also be considered physically present to be subject to sales tax. For example, having an office or other place of business in the state, hiring employees in the state, or holding a property in the state.
However, On June 21, 2018, the Supreme Court of the United States ruled in favor of the state in South Dakota v. Wayfair, Inc. which added a new principle of economic relationship taxation.
Wayfair, Inc. is a leading online retailer of home goods and furniture and had net revenues of over $4.7 billion in 2017. It does not have employees or real estate in South Dakota, while it ships its good directly to purchasers throughout the United States, including South Dakota. The Supreme Court ruled that physically present is no longer the main requirement for creating nexus, that it can also be created when a seller’s sales into a state exceed certain economic thresholds. Based on this rule, for remote sellers without physically presence in certain state, when you reach an economic relationship threshold set by a state, or you have a certain amount of sales in the state, you have been considered to have established an economic relationship with the state and must pay a sales tax in the state.
A few important concepts and considerations
- Threshold confirmation
Each state with economic nexus laws sets its own threshold that businesses must meet to have economic nexus. However, the most common economic nexus threshold is when a seller reaches $100,000 in sales or 200 transactions in a state annually. Example, South Dakota requires that remote sellers must file sales taxes in the state for sales exceeding $100,000 or transactions equal to or greater than 200 in the current or previous calendar year effective on November 1, 2018; California requires remote sellers to file sales taxes in the state for sales exceeding $500,000 in the current year or the previous calendar year effective April 1, 2019. States?thresholds for economic nexus vary upon states regulation. For more details, please consult with our consultants.
- When to declare?
As remote sellers, you don’t have to file and pay sales tax until you reach the threshold.
Once the threshold has been reached, the remote seller need to apply for the state’s seller permit to file sales tax. Taxpayer’s filing frequency and filing deadline will be notified on the seller permit. Please note that if you are a remote seller for resale or wholesale sale, you still have to apply for a seller permit.
Once an economic association is established and a license is submitted, you will need to start collecting sales tax on the end customer and file a sales tax return within each required reporting period. In the event of failure to file or pay full tax on time, penalties include late registration and late payment of tax.
- Special handling on the Marketplace Facilitator
If the remote seller uses a third-party market service provider such as Amazon, Shopify, etc., the platform usually withholds sales tax from end customers. Platforms such as Amazon and Shopify typically calculate, collect, and pay sales taxes for remote sellers. Please note that not every platform provides such service. If the Platform does not perform this service, remote sellers remain obligated to file sales taxes, and most states require that their reported sales include Platform Mall sales.
- Remote sellers keep track of their sales
Remote sellers including out-of-U.S. sellers who conduct e-commerce in the United States need to pay close attention to whether their companies meet the standards of economic affiliation and register seller permit and tax returns in a timely manner. If you don’t keep track of sales, local tax authorities can also retroactively apply sales and use taxes from the original date of operation to the present day and impose related penalties.
Remote sellers also need to pay attention that once registered for seller permit, sales and use tax returns must be filed within each required reporting period, regardless of whether sales exist.
Reference:
https://www.irs.gov/businesses/understanding-your-form-1099-k
https://www.irs.gov/newsroom/irs-announces-delay-for-implementation-of-600-reporting-threshold-for-third-party-payment-platforms-forms-1099-k
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