As I’m writing, it’s the first weekend in July and you know what that means: Essence Festival. In addition to the music and fun, there’s plenty of shopping going on this weekend. Business owners have traveled with their staff and their products in the hopes to make good money during the event.
Big events like Essence Festival are a great way to make a lot of money. They draw huge crowds, and if you have a great product you’re sure to be a hit. However, there are tax considerations when you operate your business across state lines. I know. I know. I hate being the one that has to stand in the middle of the room yelling “think about the taxes!”, but somebody has to let you know!
Now for the nerd stuff. The ability for states to impose a tax on businesses comes from the Due Process and Commerce clauses in the US Constitution.
Nexus is a legal term that determines what is “constitutionally and statutorily sufficient” for a taxing authority (eg., a state or locality) to either require a company to collect and remit sales tax or to pay an income tax on its activities within the state. Think of nexus as having a connection to that state.
There are several ways to determine nexus, such as physical nexus and economic nexus. How nexus is determined varies from state to state. In many cases, how a state determines nexus for sales tax is different from how that same state determines nexus for income tax. This means that, in the same state, a company can meet the test for sales tax nexus but not income tax nexus, or income tax nexus but not sales tax nexus, or both, or neither.
Physical nexus is determined by whether a company has employees, inventory, or property within the state. Basically, you will have physical nexus wherever your company has a physical presence.
Economic nexus is based on how in sales you have within the state, even if you have no physical presence in the state. After South Dakota successfully challenged the constitutionality of traditional nexus rules, more states are implementing laws based on economic nexus.
It’s important that you know the nexus rules for the states that you are operating in to make sure that you are meeting all of your tax obligations within the state.
SALES & USE TAX
If your business has sales tax nexus in a state you’ll be required to collect and remit (or, pay) sales tax to that specific state. Lean in, sis. Sales tax is not your income. You are simply acting as the agent of the state to collect it from the consumer and pass it on.
Based on a 1992 Supreme Court case (Quill v North Dakota, for my fellow nerds), sales tax nexus is determined by your presence in a state. Presence can include your employees, inventory, warehouses, headquarters, and branches. Your presence can be permanent (warehouse) or temporary (traveling for vendor events). Yes ma’am, traveling to Essence Festival as a vendor for the weekend can create sales tax nexus for you in Louisiana. Based on Louisiana’s sales tax laws, you may be required to collect state and local sales tax and send it to the Louisiana Department of Revenue.
In recent years with the rise of online retailers like Amazon, states have been pushing back on the physical presence requirement for sales tax collection. They started enacting laws that required the collection and remittance of sales tax for online retailers based on sales volume (affectionally called “Amazon laws” or click through nexus).
In 2018, the Supreme Court finally decided that the old way of determining nexus was “unsound and incorrect”. In South Dakota v Wayfair, SCOTUS overturned the Quill case. This means that, in states that have moved to economic nexus, you may be required to collect and remit sales tax even if you only sell online and ship merchandise to other states. Typically, you’ll need to meet a sales and/or transaction threshold (depending on the state) before you’re required to collect and remit sales tax based on economic nexus.
Be aware of sales tax holidays, the state’s deposit schedule, and sales tax return filing requirements to make sure that you are compliant.
Note for network marketers
If your company charges you retail sales tax on your wholesale inventory purchases based on where you live and you sell that inventory within the same state, you won’t be required to remit the tax to the state again even if you recoup it from your customers. However, your state may still require you to obtain a sales tax license and file a monthly, quarterly, or annual sales tax report. This report typically shows the total sales that were made and then backs out any “exempt” sales (eg., the sales that you already paid sales tax on). You may need to get a letter from your company stating that sales tax has already been collected and remitted to the state on your behalf.
However, if you take that same inventory across state lines and sell in a different state (eg., at a vendor event just across the border in another state), you *may* be required to collect and remit sales tax based on that state’s sales tax law. In this case you probably won’t be able to get a refund from the company or your home state for the tax that you prepaid. The sales tax that you pay up front is only for your state.
Again: please reach out to your state department of revenue for more information.
Selling in and shipping to multiple states can make income tax time a little tricky. Depending on state tax law, income tax nexus rules, and sales thresholds you may be required to file more than one state income tax return. To calculate your proper tax liability, you have to apportion your income to the proper states. And because nothing with taxes is so simple, each state has its own apportionment rules.
Apportionment calculations are made up of a combination of three factors: your sales within the state, your property within the state, and your payroll within the state. While the traditional apportionment calculation equally weights all three factors, many states have started to give more weight to sales with some even moving to a sales only factor.
Because apportionment rules vary, it’s possible that you may end up paying state income tax on more than 100% of your income.
Did you go to Essence Festival this year as a vendor or attendee? I want to hear all about your experience, bestie! Let me know your favorite part of Essence in the comments. If you didn’t go, say hi in the comments anyway. 🙂
Have questions? Leave them in the comments or click here to send it by email.
My circle can never be too big! Share this post with your business owner friends!