By Brian Greer – Partner at TaxConnex, LLC
The exemption question
Sales tax obligations start with nexus, the concept that enables state and local governments to require businesses to collect and remit sales tax on the products and services they sell. Simply put, nexus is a connection with a state or taxing jurisdiction and is usually defined by a physical presence or economic nexus.
Economic nexus has emerged as a burning issue for many online retailers since the 2018 decision of South Dakota vs. Wayfair, in which the U.S. Supreme Court ruled that the state of South Dakota could require businesses with no physical presence in the state to collect sales tax.
Sales of tangible personal property (TPP) are presumed to be taxable unless specifically identified as not taxable. Exemptions could apply, though, making the sale of TPP exempt from sales tax.
The most common type of exemption is a resale exemption, which is applicable to wholesale transactions. In a wholesale transaction, the buyer intends to resell the item to another entity or end-user. The buyer wants to make the original purchase exempt from sales tax, and they expect to then charge sales tax when they sell the item. The buyer will present a resale exemption certificate to their vendor, who is relieved of the burden of charging and collecting the sales tax.
Change in wholesale
Proliferation of e-commerce has also increased drop shipment transactions, with the retailer often sitting in the middle of the end consumer and the supplier/distributor. These drop shipment transactions have unique sales tax rules that can be confusing. For instance, many companies now have an online presence for taking orders and making retail sales of TPP without maintaining any inventory. Instead, they leverage other suppliers/distributors who “drop ship” directly to the customer.
Let’s say a supplier/distributor in Arkansas sells to a retailer in South Carolina and drop ships to the retailer’s customer in Illinois. The Arkansas supplier/distributor has nexus in Illinois and is registered for sales and use tax purposes in Illinois. As a result, the Arkansas supplier/distributor is required to charge Illinois sales tax unless an applicable resale exemption certificate is provided. The South Carolina retailer does not have nexus in Illinois and is not registered for Illinois sales and use tax purposes, and therefore is unable to provide a valid Illinois resale exemption certificate.
Some 10 to 15 states operate similar to Illinois, but many states allow an out-of-state resale exemption certificate in a drop shipment transaction. A resale exemption certificate must contain specific information: state tax ID numbers, the name of the seller and customer, the type of exemption and a valid signature and date from the customer. They must also be signed and dated.
At a minimum, you should consider an exemption form expired after three years. Different states have different rules. In Florida, they expire annually, for instance; still other states say a resale certificate is valid until it’s revoked.
Retailers don’t need nexus in a state or even a taxable product to request an exemption certificate. When companies have a questionable nexus footprint, they should get exemption certificates while doing business in that state. These forms are especially important in sales tax audits.
And there’s an infinite number of forms. In some states they can be customized, and in Florida you can use a printable online template.
The new player
Ecommerce has introduced yet another factor that impacts the sales tax process: the marketplace facilitator.
These are platforms where third-party sellers of any size and geographic area can facilitate retail sales, including the collection/processing of payments, in exchange for compensation. They’ve been around for years, and today some of the household names are Amazon, eBay and Etsy.
Thresholds to ignite sales tax reporting obligations are generally the same for marketplace facilitators as for online sellers. The good news for sellers: In states with these laws in place, for the most part, sellers don’t have to worry about collecting sales tax for sales through the marketplace. The marketplace facilitator is responsible for collecting and remitting the applicable sales tax.
Sellers do need to monitor these sales if they also sell through avenues outside a marketplace, such as their own website, via resale and so on. Even though the marketplace is collecting and remitting that tax, those sales need to be accounted for to determine whether a company has reached economic nexus thresholds and may need to collect and remit sales tax on their own website. (In most states, these “gross receipts” can and usually do count toward economic nexus thresholds.)
For online sellers, another concern regarding facilitators is inventory. Marketplace facilitators can maintain inventory for a seller in many different states, creating potential physical nexus and sales tax obligations – sometimes completely unknown to the online seller. Recently, (as of September of 2022) Pennsylvania ruled in favor of online sellers and stated that inventory managed by a marketplace facilitator where the seller has no direction of where the inventory is stored will not create sales tax nexus in Pennsylvania. This is a small win for online sellers.
Any way you handle it, legal and complete sales tax compliance is getting harder for multi-channel sellers. And if you are not aware of the different implications that could create sales tax obligations for you, in the case of an audit, you could be in hot water. It’s best to keep in front of your sales tax obligations and ensure you are complying where necessary. When you sell through multiple channels it becomes a bit more complex and avenues that may help you initially (like marketplace facilitators) could have a big impact on your nexus footprint.
About the author
Brian is a graduate of Purdue University and has lived in the Atlanta, GA area since 1997. Brian
has worked in the sales tax field since 2000 and prior to that worked predominantly in software
sales. Learn more at www.taxconnex.com.
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