Sales Tax Nexus

sales tax nexusI received a phone call recently from the founder of an Internet business. He wanted to know what the rules were for collecting and remitting sales taxes. His company sold items of taxable personal property off his company’s website.

I asked him, “Where are you located?”

He said, “We’re not located anywhere. We’re an Internet company.”

“Well,” I said. “You have to be physically located somewhere.” He insisted “No, we are a virtual company. We exist only on the Internet!”

I told him this wasn’t possible. That it wasn’t possible to solely exist on the Internet. I am not sure he believed me. He seemed incredulous.

“Where do you live?” I asked.

He said, “Seattle.”

“Do you run the business out of your house?”

“Yes,” he said.

“Well, then, you will have to collect sales tax on sales made to residents in this state, the state in which you do business.”

Again, he didn’t want to believe me.

If you entertain the same thought as the founder of this Internet company, then hopefully you enjoy unpleasant surprises. Physical presence exists in every business, and depending upon the state where that physical presence exists, you may or may not have a sales tax collection responsibility with respect to sales made in that state. Whether you do have an obligation to collect and remit sales tax in a particular state will depend on that state’s laws. Subject to some exceptions, generally, any state where you have physical presence that helps you establish or maintain a market for your sales establishes nexus for purposes of collecting sales taxes.

You should always consult a lawyer or a tax consultant as your business grows to ensure that you are withholding and remitting sales taxes correctly. In addition, stay tuned, Congress might change the game entirely if it passes the Marketplace Fairness Act.

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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