FAQ

General Sales Tax

Q: WHEN DO I NEED TO REGISTER TO COLLECT SALES TAX?

A: A seller is required to collect sales tax when they have a link or connection to a state, called nexus, and what they sell is taxable. This link or connection can be caused by many activities and may either be physical or economic. Some common physical activities that can create nexus are having inventory in a warehouse, utilizing independent or subcontractors in a state, having employees in a state, having employees or third parties travel into a state on your behalf, having an affiliate program in the state, and advertising in local media. These are just a few activities that can create a physical nexus.  An economic nexus can be created when you cross a certain amount of sales. The most common economic nexus thresholds are $100,000 or 200 transactions, although there are many deviations. Some states have notice and reporting requirement thresholds, which are much lower. You may find charts with thresholds and effective dates for both economic nexus and notice and reporting requirements in our resource section under charts and matrices.

Q: WHAT IS NEXUS?

A: Nexus is the industry term used to mean link or connection. It is the link or connection that must be present before a state can require you to collect its taxes, like a sales tax, or pay its taxes, like an income tax.

Q: ARE THERE STATES WITH NO SALES TAX? 

A: Yes, 4 states do not have a state-level sales tax. They are New Hampshire, Oregon, Montana, and Delaware.

Q: DO I NEED A REGISTERED AGENT WHEN REGISTERING FOR SALES TAX? 

A: In general, a registered agent is not required if you are just registering for sales tax even though many states make it look like it’s required. There is a workaround or process in most states where you can register without a registered agent as long as you do not have a brick-and-mortar location in the state. If you do need this service, we do provide registered agent representation and other services.

Nexus

Q: DO STATES CARE WHETHER SALES ARE TAXABLE OR EXEMPT WHEN ANALYZING ECONOMIC NEXUS THRESHOLDS? DO THEY LOOK AT TOTAL SALES OR JUST TAXABLE SALES?

A: It depends on the state. Some states say total sales, including exempt sales, should be included in threshold calculations. Other states say only taxable sales should be included. Some states exclude sales for resale but include other exempt sales. Some states exclude marketplace sales while other states include them. We have a free chart on our website that details what is included or excluded, as well as the economic thresholds, their effective dates, and other useful information. States are continuously updating their information, and as they do, we update the chart. The chart is called Economic Nexus Thresholds and can be found here.

Q: WHAT SHOULD YOU DO IF YOU MEET AN ECONOMIC NEXUS THRESHOLD BUT HAVE EXEMPT SALES?

A: If all your sales are exempt, then make sure you are collecting a valid exemption certificate on all your sales. When it comes to registrations, some states do not require a company with 100% exempt sales to register. However, other states do require you to register and file zero-dollar returns. The risk is when you are not collecting a completely filled out exemption certificate on the correct form.

Q: I’VE DETERMINED ECONOMIC NEXUS IN EACH STATE, BUT I NEED TIME TO RESEARCH. WHAT SHOULD I DO?

A: Once you register, you must collect and remit the tax whether you have nexus or not. In some states, the mere act of registering creates nexus, and in others, you are agreeing to collect the tax. We recommend you hire a third party to help speed up your nexus determination, especially in states where your potential exposure is huge, then go ahead and register where necessary, then collect and remit the tax while registered as you figure out the rest.

Exemption/Resale Certificates

Q: DO EXEMPTION CERTIFICATES EXPIRE? HOW OFTEN SHOULD I REQUEST UPDATED EXEMPTION CERTIFICATES?

A: In most states, certificates do not expire. However, as a best practice, we suggest updating certificates every three to four years. Many things can change in three to four years. For example, maybe the certificate was valid when it was issued, but some event has invalidated the certificate. Anything that changes a tax number could invalidate a certificate. Changes in ownership, changes in entity type, and even company relocation to a new state are some of the more common problems we see, but there are more. Having invalid certificates on file can be a ticking time bomb while at the same time providing you with a false sense of security.

Q: DOES THE DATE ON AN EXEMPTION CERTIFICATE NEED TO BE DATED BEFORE THE 1ST SALE MADE TO THAT COMPANY?

A: No, it does not need to be dated before the first sale. Some states identify a specific amount of time after the sale that you can get a certificate, and other states may say it should just be completed in a reasonable amount of time. If you're audited, almost all states allow you to go back and get missing or invalid certificates, only now they are subject to additional verification. California may or may not allow you to use an XYZ letter, but California is the only state that allows this process. In all other states, you will have to get the missing certificate or a corrected certificate if it was kicked by the auditor. 

Use Tax

Q: WHAT IS THE DIFFERENCE BETWEEN SALES AND USE TAX?

A: Technically, all sales that cross a state line are a use tax. When states first began to impose sales taxes back in the 1930s, it was commonly believed that states could not directly tax interstate commerce. So, a sales tax could only be imposed if the transaction happened 100% inside the state. To prevent out-of-state companies from having an unfair advantage, the concept of a use tax was introduced. Use tax is a tax on the storage, use, or consumption of a product or service in the state. It is not a tax on the transaction, but on the taxpayers of the state, so it’s not a direct tax on interstate commerce. If the seller had nexus, they were required to collect the use tax. If the seller did not have nexus, then the purchaser was responsible for remitting the tax directly to the state. In 1977, the U.S. Supreme Court said that states could tax interstate commerce directly, and some states did away with a seller’s use tax and only have a consumer's use tax at this point. Anywhere you have a brick-and-mortar, you generally want to register for the sales tax. If you do not have a brick-and-mortar, then you would generally sign up for use tax if the state still makes a distinction.

Q: HOW DO YOU ADVISE COMPANIES THAT ARE CONCERNED WITH PAYING PROPER SALES TAX ON PURCHASES FOR THEIR BUSINESS? IF SUPPLIERS DO NOT HAVE ROBUST SALES TAX COMPLIANCE, HOW CAN COMPANIES MANAGE THEIR EXPOSURE FOR SALES/USE TAX PAID?

A: Having a strong use tax accrual process in place can help identify invoices where tax is being overpaid, tax is being underpaid, and where tax has not been collected at all. Some companies examine every invoice, but if you make many small purchases, this can be cost-prohibitive. In cases like this, the smaller invoices are reviewed on a sample basis and invoices over a chosen dollar amount are reviewed individually. Or in some cases, you can exclude purchasers from companies who continuously get it right, and focus on the companies that don’t charge tax or continuously get it wrong. 

Taxability

Q: IS FREIGHT TAXABLE?

A: Many factors go into determining whether freight is taxable or not, and you generally need to look at the minutia to get the correct answer. In some states, freight is always taxable. In other states, the freight service must be optional to be exempt; if there is no free option for a local pick-up, it becomes mandatory and taxable. In some states, it must be separately stated and a direct pass-through of costs to not be taxable. Sometimes taxability is determined by where in the sales process the freight charges are incurred. Handling is almost always taxable. Your methods of delivery and how it is invoiced can also have an impact. This just goes to show how a seemingly simple concept can become quite complex very quickly when it comes to sales tax.

Q: ARE CREDIT CARD PROCESSING FEES TAXABLE? 

A:  In general, states define sales price to include the total amount received without a deduction for the cost of the materials used, labor, services, or any other expenses. The credit card processing fees would be taxable if the item being sold is taxable.

Registrations

Q: DO I NEED TO REGISTER WITH THE SECRETARY OF STATE WHEN REGISTERING FOR SALES TAX?  

A: In general, if you are registering as a remote seller to collect sales tax, there is no requirement to register with the Secretary of State (SOS). However, many states make it look like it's required. In most states, there is a way to bypass this option, and if you're registering with the SOS, you have probably made a mistake.

Q: DO I NEED A REGISTERED AGENT WHEN REGISTERING FOR SALES TAX?  

A: No. Registered agents are generally associated with registering with the Secretary of State.

Q: WHY WOULD I BE REGISTERED FOR A RETAILER USE TAX RATHER THAN SALES TAX?

A: In any state that makes a distinction between a retailer use tax and a sales tax, a sales tax is usually only an option when you have a brick-and-mortar location in a state. Technically all sales that cross a state line are a use tax and not a sales tax. In some states, this use tax, which is collected by the seller, is called a vendor use tax or seller use tax.

Q: DOES REGISTRATION FOR SALES TAX CREATE INCOME TAX NEXUS?

A: No. Registering for sales tax does not create nexus for income tax. Your either have or don’t have income tax nexus based on your activities.

Sales Tax Audits

Q: HOW SHOULD I HANDLE AN UNRESPONSIVE SALES TAX AUDITOR?

A: In general, you should start by speaking with the auditor. Ask the auditor why the audit is taking so long and when can you expect completion. If you don’t like the answers, ask to speak with the auditor’s manager and explain that you want to cooperate but if there is an assessment, interest is continuing to accrue. If you don’t make any headway, I would hire a third party like us. States often respond very differently to firms that provide audit defense than to a company.

eCommerce

Q: IF I’M AN AMAZON SELLER, THEN DOES MY NEXUS MATCH AMAZON’S NEXUS?

A: No, there is no direct correlation between Amazon’s nexus and the nexus of an Amazon FBA seller. Amazon may have nexus for a multitude of reasons, including, but not limited to, having all types of facilities or employees in a state. An FBA seller will generally only have nexus attributable to Amazon where they have inventory in an Amazon warehouse.

Business Licensing

Q: WE ARE A LEASING COMPANY AND HAVE EQUIPMENT SITTING IN ALL STATES AND MANY, MANY CITIES AND TOWNS. THE SALES TAX PART OF IT IS EASY; HOWEVER, HOW DO YOU GET YOUR ARMS AROUND THE LOCAL BUSINESS LICENSES THAT OFTEN ARE AUDITED BY THE SALES TAX AUDITOR? THE CITIES AND TOWNS ARE IN THE HUNDREDS.

A: Many companies outsource business licensing functions. For those that don’t, there is specialized software out there that will help track where you are licensed and when renewals are due. Some companies only register where their biggest continual exposure is, and some companies register everywhere. It’s all about materiality. While you do not mention property tax, this could also be an issue if you're not already on top of it. We offer business licensing and compliance services.

Drop-Shipping

Q: LATELY, OUR COMPANY HAS BEEN RECEIVING SALES ORDERS FROM COMPANIES OVERSEAS AND ASKING US TO DROP-SHIP TO A CUSTOMER IN A STATE WE HAVE NEXUS IN. OUR CUSTOMER SAYS THEY SHOULDN'T BE CHARGED TAX. ARE THEY CORRECT?

A: Unless your customer has a specific exemption, you must collect either the tax or a certificate in lieu of the tax acceptable to the state where an item is delivered. You do not have an option. It does not matter where your customer is located. A customer is never asked where they have nexus when determining what state’s rate to charge. This is no different just because your customer is foreign. However, there are 36 states where your customer can provide some form of alternative resale documentation without having to get registered. This will prevent you from having to charge the tax. However, in some states, your customer will need to be registered in the state in order to provide a valid certificate. We have a chart available in the premium portion of our website that identifies the different forms of alternative documentation customers with nexus may use for each state.

Canadian

Q:  WHAT ARE THE TYPES OF SALES TAX IN CANADA? 

A:  In Canada, there is a federal-level tax and a local-level tax. The federal-level tax called the Goods and Services Tax or GST is a value-added tax (VAT). Once you are registered for the GST, you will collect the tax in all 10 provinces and three territories. The five provinces of New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Prince Edward Island have decided that they will have the same rules as the GST, and they allow the Canada Revenue Agency (CRA) to administer the collection of the tax along with the GST. The local tax for these five provinces is called the Harmonized Sales Tax or HST because these provinces have harmonized their tax with the GST. You are automatically approved for the HST when you register for the GST.

The province of Quebec has a local sales tax called the Quebec Sales Tax or QST. It is a value-added tax and has virtually identical rules to the GST/HST.

The provinces of British Columbia, Manitoba, and Saskatchewan all have local-level sales taxes, which are actually sales taxes and not value-added taxes. They are collectively referred to as Provincial Sales Taxes or PSTs. Individually, British Columbia and Saskatchewan actually call their tax the Provincial Sales Tax or PST, while Manitoba calls their tax the Retail Sales Tax or RST.

The remaining province of Alberta and the three territories do not have local taxes.

International Sellers

Q: DO I NEED A U.S. ENTITY TO SELL IN THE U.S. OR COLLECT SALES TAX?

A: A U.S. entity is not required to sell in the U.S. or collect sales tax. We have many clients that keep their foreign entity and some that even operate as sole traders/proprietors. In some instances, opening a U.S. entity can complicate income tax requirements. However, if you want a U.S. entity, we can form it for you.

Q: ARE THERE ANY BENEFITS OF OPENING A U.S. ENTITY?

A: If you are working with U.S. suppliers, some of them can/will only work with U.S. entities. The reasoning varies, but a big one we hear frequently is the supplier is often limited because of territory and/or licensing issues with their supplier. In these instances, a U.S. address is generally also required. Not all suppliers have either of these requirements, but we can provide a U.S. address as well as a U.S. entity.

Q: IS AN EIN/FEIN REQUIRED TO SELL OR COLLECT SALES TAX?

A: Most states require an EIN/FEIN to register to collect sales tax. An EIN/FEIN is generally not required to sell in the U.S. However, some, but not all, vendors/suppliers may require it if you are making purchases in the U.S. Your logistics company/customers’ broker may also require it. We can assist you in getting an EIN/FEIN.

Q: IS A SOCIAL SECURITY NUMBER OR ITIN REQUIRED TO REGISTER FOR SALES TAX?

A: If you are a U.S. resident, you must generally supply one of the two. If you are not a U.S. resident, you do not have to have either. The states make it appear you do, and if you do not know the workarounds you may get stuck. The state is often difficult or impossible to work with unless you get to the correct person. The process takes longer and has more steps in some states.

Q:  I DON’T HAVE A BANK ACCOUNT IN THE U.S. CAN YOU STILL HELP ME WITH MY SALES TAX?

A:  We do not require a U.S. bank account to file sales tax returns, remit taxes to the states, or for any of our other services. However, the states and other companies that provide sales tax returns services often require a U.S. bank account. We actually open a segregated U.S. bank sub-account under our master account for the payment of your taxes.  

Q: CAN YOU ASSIST WITH OR COMPLETE FORMS SUCH AS THE W-8BEN-E OR W-8BEN FORMS?  

A: Yes, we have a service where we can assist or complete your W-8BEN-E or W-8BEN forms.  

Q: COULD I HAVE MY MAIL FROM THE VARIOUS STATES SENT TO YOUR FIRM?  

A: Yes, if we are filing your sales tax returns you may use our address as your mailing address.