How To eCommerce: Common Tax Questions for Interstate and International Sellers
Let’s say you are an agency who wants to expand into e-commerce. Maybe it starts with distributing digital goods for a client, or perhaps selling merchandise overseas. E-commerce can be tricky business, especially when dealing with interstate and international laws, duties, and taxes. In this article, we will go over all the main points dealing with American e-commerce in the entertainment industry.
While this article serves as an informational guide for the entertainment industry, your situation will always be unique and we recommend you reach out to a specialized lawyer or sales tax expert for your specific needs. This article should NOT be used in lieu of proper legal advice.
Within State
The first issue to tackle is how to handle transactions within your state. This will almost always require a sellers permit obtained through your state. However, many states distribute sellers permits through county or local government. Research how to obtain a sellers permit for your own state before anything else; for California, a sellers permit can be obtained through the Board of Equalization. If you are already an established company, you should have a sellers permit for your services already.
Next, you will first want to determine the type or types of goods you are selling. Depending on your state, certain goods and services may or may not be taxable. For example, digital goods in California are not taxable. So if you are only in the business of distributing digital products, you won’t have to worry about collecting sales tax in California.
Normally, you only need to pay sales tax for your own state. For years, if you were selling products to customers in other states, you did not need to consider collecting taxes. But you do need to check is whether your company has a valid nexus in another state. A “nexus” is legalese for significant presence. A nexus can be established by 1) where your company is run, 2) if your company has an employee conducting business there, or 3) you have inventory and ship out from that state. If you meet any of those criteria, you legally have a nexus in another state and you must collect sales tax exactly as if your company resided in that state.
For a small business, you nexus is likely only in your home state. But as your company and inventory needs grow, you will eventually find yourself with nexuses in other states. If you have any distribution/fulfillment warehouses in other states, you will need to collect sales tax as your stock in a warehouse would constitute a nexus. Avalara has a great resource for managing your sales tax and inventory management.
Out of State: Amazon Laws and Agency Presence
Ok, so far, research all the relevant laws for your state and make sure that your e-commerce model is in line with the law. Make sure you are doing the same for any other company nexuses and you are in the clear!
Not anymore, unfortunately. The reason why you never had to collect sales taxes from other states is because only the federal government can regulate interstate commerce. In 1992, the US Supreme Court ruled that a state cannot collect sales tax from online purchases if the seller has no physical presence in the state. Hence, the requirement of having a “nexus” in a state was required to collect taxes.
But the internet has thrown a huge wrench in this ruling. With the rise in online marketplaces and ecommerce giants like Amazon, many states were losing tax revenue from citizens who realized they could obtain goods quicker and easier by shopping online to another state. Over time, many states passed “Amazon Laws” to help to curb this epidemic. Amazon Laws stated that if a state-based company promoted another company online, the latter company would be subject to taxes from the initial state’s nexuses. This was described as a “click-through nexus” as this was commonly applied in cases where a company site contained links to other companies.
A click-through nexus isn’t the only method for establishing a nexus in another state. Agency presence is when a company contracts an independent sales agent or company that provides services on the company’s behalf in a state on a regular basis. For example, if you are a merchant of record selling products on behalf of your customers, and your customers assist in promoting the products, then you have created an agency nexus and must collect and remit sales tax in your customer’s state.
South Dakota V Wayfair
Unfortunately, the world of e-commerce is about the change drastically. This past June, the Supreme Court has ruled against the 92 decision. The state of South Dakota sued Wayfair, who did not have an economic nexus in South Dakota. But with the new culture of internet shopping, the Supreme Court ruled in favor of South Dakota. Now, any online retailer selling to South Dakota must collect sales tax if certain conditions apply. These conditions are 1) more than 200 yearly transactions or more than 200 transactions in the year prior or 2) making more than $100,000 in revenue from the state’s sales per year.
Seeing as this ruling was only a few months ago, many states have not yet adapted to the new precedent. But you can definitely expect them to. The state of Washington has already adopted similar laws as South Dakota’s. Unfortunately, this means that interstate e-commerce will be a lot more complicated moving forward. As laws are set in place, you will need to be very cognizant of the different requirement of each individual state you are selling in. While the $100,000 transaction limit won’t be reached by many businesses, it is not unreasonable for a small company to break 200 transactions in several states (assuming states follow South Dakota’s current model).
You can read an in-depth look at South Dakota V Wayfair on Thomson Reuters’ blog here.
Rental Purchases for Tradeshow Events
Under Publication 46 for CDTFA (California Dept. of Fee and Tax Administration), there are provisions set to make sure you are paying and remitting the proper amount of sales tax for leasing tangible property (i.e. renting).
We recommend reading the full publication here, but a here’s a useful tidbit concerning the rental of property being constructed for a specific event (i.e. you hire a booth builder and rent a custom made booth for a show).
Question: We acquired some material and paid sales tax on the purchase price to the vendor. Subsequently, an outside party fabricated it into equipment and charged us sales tax on the fabrication labor. We are now leasing the equipment. Does tax apply?
Answer No. If tax has been paid by a lessor on the full purchase price of the property consisting of the cost of materials and outside fabrication labor, no tax is due on the rental receipts from the leasing of the property.
Because taxes were already paid on the materials, no taxes are due on the rental receipts! This only applies within California, but it is to your benefit to do your research on other states hosting upcoming tradeshows to see if similar clauses exist.
Selling in Europe
VAT can be a very confusing topic for newcomers to international commerce. VAT is value added tax. For simplicity, you can think of it as sales tax in Europe. Unlike America, where other states cannot compel you to pay their sales tax, nearly everything purchased by a European citizen needs to have VAT, regardless of the origin of the seller. VAT is charged on a majority of goods and services in the EU, but there are some exemptions. You will have to research what goods and services do not require VAT, and check if they are applicable in your business. Different countries have different VAT rates, some reaching as high as 20%.
To prepare for selling to European customers, you need to register for VAT MOSS. MOSS stands for Mini One Stop Shop; an option for non-EU countries to consolidate all their VAT into a single tax return instead of dealing with multiple countries at the end of the year. For language simplicity, most American companies choose to register in Ireland.
Once registered, you may begin selling to EU customers. However, you do not need to collect VAT from everyone. If you are selling to another business (B2B), they can have a VAT number (VRN) that exempts them from paying VAT. Since they will be reselling as their business, this allows them to pass on VAT to their customers. However, this has been the source of tax evasion in the past, so if you are presented a VRN, make sure to verify it online first.
Whenever you make a transaction in the EU make sure you collect the right VAT rate for the customer’s country of residence. Each transaction should have detailed invoices and records that include: your companies name, address, and VRN; date and invoice number; buyer’s name and address; and VAT amount and rate applied to each item, final amount after VAT is added, and the currency used.
At the end of each quarter you will need to submit VAT returns through your MOSS. You have 20 days to file and pay from the last day of each quarter.
You pay have heard about VAT thresholds, but those figures do not apply for overseas sellers. In the UK, if you are selling and importing goods, you must register for VAT regardless of any sales thresholds. To read more on what is required for VAT, check out the UK official VAT guidance site here.
GDPR
We’re almost there! The last topic we will cover is another new development in e-commerce. GDPR stands for General Data Protection Regulation; a bill passed in 2016 that took effect this year. It was a comprehensive reform to ensure that laws in the EU protected people’s right to their own data online.
However, GDPR has received some criticism for being too vague. It is important to remember that the goal of GDPR is to protect people’s data. In short, you are not allowed to collect data or store data that is not explicitly related to the business you need it for. Moreover, customers should be aware that you are collecting data, what data you are collecting, and how and when it will be used.
Data you normally collect, such as a customer’s name and shipping address, can still be collected normally, as it falls in your regular course of business. But GDPR wants you to know how long you will need that data for, and make sure the customer knows how you will be using that data. For example, you cannot use email addresses you collected for shipping notifications to start a marketing campaign. EU customers have the right to know what data is being collected and how exactly it will be used. They also have the “right to be forgotten” so it is imperative that your business manages and upkeeps all customer data correctly. GDPR recommends appointing an official processor for maintaining records and processing activities.
In the end, GDPR is a general guideline for protecting data. It is put in place to make sure that companies do no abuse or are negligent with customer data. You can read more about GDPR on the official summary.
Conclusion
We covered a lot of complex topics, so we have summarized the important points below:
A significant presence (office, employee, or stock) creates a nexus in a state. You must collect and remit taxes from customers in every state that your company has a nexus in
Research what products/services incur sales tax in your state and nexus’ states. For example, digital goods are not taxable in California.
Significant presence can also be established through agency presence (3rd party) or click-through nexus (out-of-state company that promotes your products/services on their website)
Due to Wayfair v South Dakota, you must collect sales tax from South Dakota customers if you make over 200 yearly transactions or more than $100,000 annually. Other states, such as Washington, are following suit so keep an eye out.
For most cases, if you are selling in the EU, you MUST collect VAT. Read above for a step-by-step guide on how to register and collect.
EU customers have strong protections for their personal information due to GDPR. Ensure you are not misusing data you collect from EU customers.
There are many untapped markets for your company to reach out to in other states and countries, but make sure to do your due diligence when it comes to the appropriate laws to follow. We hope this article has cleared up the basics of interstate and international e-commerce for your future endeavors. Again, for any specific questions or cases, we recommend you reach out a specialized lawyer. To see one of our e-commerce shops that we built and operate, click here.