Question: How Do I Know If I Must Collect Sales Tax for States Where I Do Business?
You are doing business in several states and you make sales in those states. Do you have to collect sales tax? It depends...
You (your business) must collect, report, and pay sales taxes in every state where you have a nexus (presence), for sales you made in that state. The determination of nexus is based on certain activities or physical presence in a state which require sales tax to be collected on taxable sales in that state.
State Laws and Sales Taxes for Online Businesses
State laws for collecting sales taxes for online businesses are changing all the time, as more states are requiring sales taxes be collected for all online transactions. Nolo has a guide to current internet sales tax laws in all 50 states.
Some Possible Ways Nexus Can Be Determined
Here are a few of the most common determinants of nexus for sales tax purposes:
- If you own or maintain an office, distribution house, warehouse, or other place of business, either directly or by a subsidiary
- If you are an out-of-state retailer that has a representative in the state (permanently or temporarily)
- If you have an employee representative who solicits sales in the state
- If you have an independent broker or jobber who is under contract with your company to solicit sales in the state
- If you have an employee or representative who acts as your consultant and who provides regular and significant services to a customer or customers in the state
- If you sell and install property in the state
- If you are a construction contractor performing a contract, in whole or part, within the state
- If you are a retailer that performs service work in the state
- If you regularly engage in delivery of your products by your own trucks in the state.
How to Determine if You Have a Nexus in a State
State laws regarding nexus and the concept of "doing business" in a state vary widely from state to state. The only way to find out if you may have a nexus in a state is to check with that state. This means that if you are doing business in several states, you will have to check on each one.
If you are doing business in Kentucky, for example, go to the website for the Department of Revenue for that state (it might be called something different). Look up the term "nexus" or "remote retailer" or "doing business," to see how Kentucky defines the term. Decide if your business presence in Kentucky meets the requirements for nexus. If you are not sure, you might need to call the state to get a determination. Some states will ask you to fill out an online form to get more information before they give you a determination.
Origin-based sales tax vs. destination-based sales tax
Whether you must collect sales taxes on transactions also may be determined by whether your business is in a state which collects sales taxes based on origin or destination. William Perez, Guide to Tax Planning, has more information on whether or not you must charge sales taxes.