Want to know how to not get completely SCREWED by State Sales Tax this year as your business reaches 7 Figures and above? Here we go!
In this lesson, we want to dive deep into the world of sales tax especially if you are at the range of 7 figures + and I will tell you why this is a big concern and it has everything to do with a word that starts with the letter “T”: Threshold.
Specifically individual state thresholds.
But first let’s start with the fundamentals.
So what is sales tax?
Sales tax is Consumption tax imposed by the government on the sales of goods and services. So in the US sales tax is charged to the ultimate user, usually the consumer of the product. Unlike VAT which you frequently see in European countries, which is taxed each stage of the production cycle.
For example in VAT countries, you would get taxed if you buy cotton from someone, then taxed if you make it into a T-shirt to sell it to a distributor and then that distributor will get taxed the marginal difference from packaging the tshirt to sell to the retailer and so on. In the US tax is just at the end consumer.
Sales tax is all done on the state and local level and nothing on the federal level which actually makes it extra crazy since each state has its own stakes rate
How Do I Keep Up With So Many Sales Taxes?
So you may be asking, ok i guess that’s not too bad so I just have to keep up with about 45-50 state sales rates right? Yeah I wish it was that simple…what’s even more insane, most states allow the cities, counties and districts to create their own sales tax rate too, which means there could be over 900-1000 sales tax rate you may need to keep up with!
This ruling changed the game for online businesses. On June 21, 2018, The United States Supreme Court ruled 5-4 in South Dakota v. Wayfair states that states can mandate businesses without a physical presence in a state with more than 200 transactions or $100,000 in-state sales, collect and remit sales taxes on transactions in the state.
What Is Nexus?
What does it mean? Nexus is defined as a connection or affiliation to an area that triggers sales tax. That’s all. There are two main ways that you can trigger nexus. One is physical presence and the other is economic condition
Here are some common activities that will trigger Nexus.
- Office, store or other location in a state
- Employee, salesperson, contractor, etc.
- Owning a warehouse or storage facility
- Storing inventory in a state (ie. Amazon FBA warehouses or other 3rd party fulfillment center)
- Having a 3rd party affiliate in a state
- Temporarily doing physical business in a state for a limited amount of time, such as at a trade show or craft fair
So understanding the threshold and when they trigger as it is different for each state is HUGE. you can literally put tens of thousands of dollars of profit back into your pocket if you understand each state’s threshold better and really break it down.
As you can see by doing this you can potentially save so much money as a 7 figure ecom owner by understanding
1. When you actually have to register and pay sales tax.
2. When you can avoid paying certain states sales tax by understanding what are the triggers that would force your business to register in that state.
At the end of the day it is important to be compliant so you don’t get slapped with heavy fines and penalties. In Some states that can be as high as 22% of your revenue figures. That would not help with your profit margins one little bit.
If you like to learn more in depth about topics like this, check out our link in the bio for our online course titled Tax Free Ecom: Hyperdrive your after tax profit to learn how you can save tens of thousands on your taxes every year and business strategies that will open your eyes on all the advantages you should be using that billion dollar companies utilize to grow their business.