Consultant’s Corner: Sales Tax on Out of State Sales

Question: We are beginning to get out of state orders, how do we handle the sales tax on these out-of-state transactions?

State and local sales and use tax laws vary; however, for sales made to customers in the U.S., when a business has no physical presence in a state, it typically has no obligation to collect sales tax in that state. Thus, if your business sells products or services only from a retail store or an Internet website business, you would collect sales tax only on sales of taxable products or services sold (shipped or delivered) to customers in your state of business. Sales to customers in other states would be exempt because they are bona fide interstate commerce. However, selling products through drop-shippers located in other states, going into a state to make sales calls, having sales reps in other states, and in certain states having sales affiliates based in those states, can constitute physical presence and create “nexus” – the obligation to collect sales tax in a state where you do not have a physical office. An important nexus criteria is “continuous” presence. For example, e-commerce companies often collect sales tax on all Internet sales because they have sales representatives who actively solicit in each state.

If your business is obligated to remit state and/or local sales tax in other states, you would need to comply with the sales and use tax registration, collection, remittance and reporting requirements in each of those states. You can review the following website for information on sales and tax regulations, including registration, reporting and remittance requirements, and taxation of out-of-state and Internet sales:

Do I Need to Collect Sales Tax? | Inc.com

Internet Sales Tax

If your business is using drop-shippers located in other states, you will need to research the state and local sales and use tax requirements in each state where your drop-shippers are located to determine your sales and use tax obligations in those states.

If you are unfamiliar with your business’ state sales and use tax obligations, we strongly recommend that you review your specific business operations with a state sales and use tax specialist with your state Department of Revenue and your local tax advisor or CPA, both of whom can help you determine your sales and use tax responsibilities. Also, if shipping your products or offering products for sale online to customers outside the U.S, we recommend that you contact local tax and legal professionals in the countries where you ship/deliver your products to clarify the local tax and other regulatory requirements.