How to collect sales taxes away from home
If you have a thriving small business headquartered here in Wisconsin and want to begin soliciting business from out-of-state clients, you need to know about what lawmakers refer to as nexus.
Nexus, also known as sufficient physical presence, affects thousands of businesses in the United States. Back in 2010, the Journal of Accountancy said nexus, the determining factor of whether an out-of-state business selling products into a state is liable for collecting the tax on sales in the state, can be a hidden danger for companies with a multistate presence. But it doesn’t have to be. One key to successfully navigating these widely varying provisions is for you to talk to your tax professional and review the statutes and rulings of each state in which you are considering doing business.
If you want to increase profits through out-of-state business, it is essential for you to understand how these taxes will affect your bottom line. Here are the types of taxes under nexus that need to be considered:
- Sales and use tax: Imposed when a business has a physical presence such as a contractor, salesperson, or location within the state. Several states also have a number of different events that create nexus. Some businesses might find it advantageous to solicit sales online through an out-of-state agent using a company website. This form of business is no longer just done by online retailers such as Amazon and eBay but is now used by many small to mid-sized businesses. Until 2008, no sales and use tax was imposed on these transactions, but since then, 24 states have adopted “click-through nexus,” whereby they collect a tax on transactions in which out-of-state vendors compensate residents for sales made via links on their websites.
- State income tax: Imposed when an out-of-state company derives income from sources within the state. Some companies are protected by the U.S. Interstate Income Act of 1959, commonly referred to as Public Law 86-272. State income tax may not be imposed on a company whose only connection to the state is to solicit sales of tangible personal property. In order to be considered under this law and avoid taxation, sales must be approved and shipped from outside the state. Any activities beyond this will likely impose a state income tax.
- Franchise tax: Half the states in the U.S. impose this type of tax, which is based on apportioned capital, net worth, or other non-income base factors.
The best way for you to mitigate these taxes and find an overall tax-based strategy is to talk to a CPA or other tax adviser with experience in your respective field. Finding the strategy that is right for your business could be the difference between being the competition and beating the competition.
You can read more about nexus here or here.
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