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Understanding the State Tax Implications of Consumer Direct Sales

Understanding the State Tax Implications of Consumer Direct Sales

Nov 19, 2016

Many manufacturers, distributors, and retailers looking for additional sales and revenue are considering selling directly to consumers. While there are potential benefits, there are a few state tax considerations you should factor into your decision making.

Where do you have sales tax nexus already?

A manufacturer may already have sales personnel soliciting sales for its wholesale or manufacturing channels. While this activity has created sales tax nexus in all states in which solicitation has occurred, there might have been no need to register for sales tax because all sales were likely exempt as sales for resale.

Is your product subject to tax if sold directly to consumers?

While your sales may be exempt in the wholesale channel, there may be no exemption available if your product is sold directly to individuals. Therefore, sales tax collection may be required if you are selling taxable products to individuals in a state in which you have sales tax nexus.

Are you selling online directly through your website?

Many companies start the consumer direct sales in this manner. Usually there are no multistate nexus concerns to this approach by itself.

Are you planning to sell through a third party like Amazon or eBay?

Generally an eBay account or the Amazon merchant account is just a marketing option; the company still maintains the inventory and makes the sale. Amazon also offers Amazon Express, in which it purchases the inventory and makes the sale to the customer directly. Contrast this with the Fulfillment by Amazon approach, in which the company holds inventory at numerous Amazon distribution centers and makes the sale directly. The maintenance of inventory at an Amazon warehouse generally will create nexus for both sales tax and corporate income tax purposes. There are limited exceptions like Virginia, which allows a safe harbor for this type of activity.

Next steps

Once you have created nexus, you have to deal with sales tax reporting in all of those states. There are various third parties that provide software capabilities to assist in this process, like VertexSMB and TaxJar. Depending on your internal resource availability, these providers can either assist you in preparing the returns internally or outsource the preparation and filing of the returns. For more detailed information, please consider attending our December 14, 2016, webinar, Multistate Nexus Update: Latest Developments and Costs of Noncompliance. Wipfli also performs nexus reviews and voluntary disclosure project services to companies that may have activities outside their home state which need to be reviewed.

Author(s)

Daryl Ohland
Daryl L. Ohland, CPA, CIRM, MST
Director
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