I can get anyone started in using the QuickBooks Online sales tax module, using correct set up and operation as the module currently functions.
Talking Sales Tax and Use Tax:
Nexus tracking from products and services sale tax set up is based on the location of your business. Be sure to check the invoice and apply the appropriate tax based on the state you are shipping to (destination) unless you are in an origin-based state.
Tax situs refers to the place or jurisdiction that has a strong connection with assets that are being taxed. This means that the state or country where the assets are located or where they were earned may have the right to tax them. Where the situs of something is depends on the type of item and can have important legal consequences. For most physical items the situs is the place where the object is located at the time of sale. (origin ship from) not necessarily the sellers situs.
If only:
In the Sales Tax Module, rather than just "State", use zip codes (since most states are zip code based) both foreign and domestic. The ship from address would then be used as guide to product location (with number of transactions per zip code to separate destination and origin-based states) for Nexus tracking. A report by zip code for dollar amounts, then could be used to calculate the total liability per zip code and by number of transactions.
The seller should collect the tax for the state zip code where the product is shipped from, to the buyer in a destination-based state and sales tax would be collected based on the rate of the seller in an origin-based state, with consideration for product location and jurisdictional taxation. If the module is set up to track zip codes and Nexus thresholds are met, the seller will be able to instantly run a report to determine if they should register for a State (or zip code) Sales Tax License.
I cannot stress to you the importance of obtaining the Buyers' full address information.
Consider these scenarios:
If the seller ships items into a state where it doesn’t have nexus, no tax should be charged by the seller, unless the seller and product is in an origin-based state.
If the seller is NOT registered in a state where the product location is (drop shipping) they will not collect sales tax. However, in this case, the buyer has the obligation to remit use tax to the state where it uses and consumes the items.
If the seller is located in an origin-based state and the product is also shipped from their state, sales tax would be charged at the rate of the seller's state.
If the seller is in an origin-based state, (drop shipping) a product from another location where they DO have nexus registration, sales tax should be charged at the rate of the products location.
If the seller is shipping to a buyer in a destination-based state and has nexus in that buyer's jurisdiction, sales tax should be charged at the rate where the buyer is located.
If the seller does not have nexus, no sales tax should be charged, and the buyer is responsible for paying use tax.
If the seller is in a destination-based state shipping to an origin-based state, sales tax would be charged at the states origin based, rate of the buyer.
To determine Nexus, consider, in order:
1.) Product Location and Type (Location: product origin on a sales receipt or invoice)
2.) Seller's location (Ship from header address on a Sales Receipt or Invoice)
3.) Buyers' location and potential exemptions (ship to address/customer specific)
Suggestion to sellers: Obtain a legal determination letter.
a) Sign up business owners for emails from their State Sales Tax Department of Revenue and/or The Tax Foundation
b) Use a Disclaimer on Invoices you are not collecting sales tax on, confirming to the buyer that they understand they will owe use tax in their state, or the appropriate state of situs.
In the context of sales tax, "nexus" refers to the connection or presence a business has in a specific state or jurisdiction that requires it to collect and remit sales tax on transactions. Nexus is a legal term that determines whether a business is obligated to comply with a state’s sales tax laws.
Nexus Defined:
Types of Nexus:
Physical Nexus This is established when a business has a physical presence in the state, such as:
A retail location
A warehouse or storage facility
An office
Employees or sales representatives operating in the state
Economic Nexus This applies when a business exceeds certain economic thresholds in a state, regardless of physical presence. Common thresholds include:
A specific amount of sales revenue (e.g., $100,000 in a calendar year)
A certain number of transactions (e.g., 200 transactions in a year)
Economic nexus laws were significantly influenced by the 2018 South Dakota v. Wayfair, Inc. Supreme Court decision, which allowed states to impose sales tax obligations on businesses without a physical presence.
Affiliate Nexus This occurs when a business has ties to an affiliate or subsidiary in the state that helps facilitate sales, such as advertising or distribution.
Click-Through Nexus Some states require sales tax collection if a business has agreements with in-state affiliates or individuals who refer customers through links on websites (e.g., affiliate marketing).
Marketplace Nexus Marketplace facilitators, such as Amazon or eBay, are often required to collect and remit sales tax on behalf of third-party sellers using their platforms.
Key Considerations: Talking Sales Tax and Use Tax
Nexus rules vary by state, and businesses must evaluate their activities in each jurisdiction to determine compliance requirements.
If nexus is established, businesses typically need to register for a sales tax permit in that state, collect sales tax on taxable transactions, and remit it to the state.
Understanding nexus is crucial for ensuring compliance with sales tax laws and avoiding penalties.
Contact BookkeepingBusinessOnline.com for assistance with your sales tax setup!
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