State Sales Taxes for Startups 101 - All you need to know
Even money losing, early-stage companies may owe state sales taxes. This becomes even more of an issue if your company has remote employees in many states, and as you have a greater number of “transactions” and revenue from various locations.
Tax nexus is the relationship between a taxing authority and a business. The way it goes is a business has to have one before it can be taxed.
So there are a couple of different types of thresholds to establishing a state tax nexus.
The basic idea is you must have a prominent presence in a state. There are a couple of ways for you to check and see if your company has this. The simplest way is just to see if you have a state registration to do business in that particular jurisdiction. The reason for that is when you start conducting business in a state, typically you have to register. The state knows you registered with them; so they are more likely to check on you and make sure you're filing the right sales tax and tax returns. So that's the first shortcut.
The more established way is to evaluate whether you have employees, assets, or property in a state. Anyone who's working in a state will start triggering a state tax nexus.
So for example, if you're a startup, and you have a W2 employee working in North Carolina, and that W2 employee is renting office space, you are going to start triggering a nexus in North Carolina. That is, that's a pretty clear cut. It's a little tougher to determine sometimes if there's a computer or some very small amount of assets in North Carolina. But, you can pretty much bet that if you have employees in NC, then you are going to have a nexus.
It's really important to distinguish between employees versus contractors. If they are contractors, and they have their equipment, such as their own laptop, you are not establishing nexus in that state.
Now, in the modern-day, there’s a lot of business conducted over the internet in the form of eCommerce sales, software or SAAS sales, or service sales.
A few years ago, the states realized this and felt like they were missing out. They brought it to the Supreme Court. The case was called Wayfair versus South Dakota, and the Supreme Court ruled in favor of South Dakota. This ruling gave states the ability to tax businesses, even if they didn't have a physical presence in the state. You can read more on the Supreme Court’s sales tax ruling here.
So all of a sudden, online sales, online software sales, online diagnostic, or some forms of biotech stuff, all of a sudden become taxable if they pass a certain threshold of around $100,000. Of course, this has to be made even more confusing by some states having their sales taxes be based on a different revenue number in that state, or them having a particular number of “transactions” in that state, or a combination of things.
AND, not all states are collecting this type of sales tax. So the sales taxes you owe are really going to be dependent on the specific number of sales, specific states, and the dollar amount of your sales in those locations. It gets confusing fast.
However, if you're doing business across the United States, and you have some states where you're getting close to that $100,000 threshold, it's getting very likely that you have created a tax nexus, and you'll have to file sales tax returns. You'll probably also have to file a state tax return.
In closing, the big picture on the tax nexus is that if you're doing business in a state physically with employees, property, assets, etc. you have most likely triggered the tax nexus. If you're doing business in the sense that you're selling a lot of goods or services over $100,000, you have also probably triggered tax nexus.
Need state sales tax help or just want to leave it up to the experts?
We can help you out and can do a study for you. We will parse this figure out if you have triggered nexus and we can take care of all the forms you need to file. Feel free to contact us to learn more.Contact us today for a free consultation!
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