If you want to understand your sales tax liability as an ecommerce seller, you’ll need to understand the difference between physical and economic nexus. In this post, we examine the difference between these two concepts and how it affects your business.
A remote seller is any business that sells taxable goods or services in a state where they have no physical presence, also known as physical nexus.
Two years ago, remote sellers didn’t have to collect and remit sales tax for their transactions. But that changed in 2018, when South Dakota v. Wayfair established economic nexus. This gave states the power to pass laws making remote sellers liable to collect and remit sales for their transactions.
A marketplace seller is anyone who sells through a marketplace facilitator. The vast majority of states have passed marketplace facilitator laws that require facilitators like Amazon and Walmart to collect and remit tax on sales made by 3rd party sellers on their platforms. These laws have relieved the collective marketplace sellers of billions of dollars of liability.
The categories of remote and marketplace sellers are not mutually exclusive. One or both of these terms could apply to your business.
If you’re a marketplace seller, you could also be considered a remote seller, because you don’t have physical nexus in the state.
But if you use programs that store your inventory in a state, such as Fulfilled By Amazon, that will establish physical presence. You’re still considered a marketplace seller, but you’re no longer considered a remote seller.
Of course, if you don’t sell through a marketplace facilitator, you can still be a remote seller, depending on your physical presence in each state.
It’s important to note that this assessment takes place in each state you do business. It’s possible to be a remote marketplace seller in one state and a non-remote marketplace seller in another.
If you’ve been keeping up with the latest developments in facilitator laws, you likely know your status as a marketplace seller relieves you of significant sales tax liability. But many marketplace facilitators aren’t aware that the relationship being a marketplace seller and being a remote seller has an equally significant impact on sales tax liability.
The spread of facilitator laws has enabled many marketplace sellers to cancel their state sales tax accounts. One of the most important criteria for canceling your accounts is that you have to be a remote seller. Evaluating your physical nexus is an essential step in canceling your accounts while remaining compliant.
And, as we mentioned above, some marketplace facilitator programs can cause you to lose your status as a remote seller. This can interfere with your attempts to cancel your tax account.
For ecommerce sellers, understanding the difference between physical and economic nexus can be confusing. But it’s still critical. So, as you acquire customers in new states and change your relationship with marketplace facilitators, pay attention to your shifting nexus exposure.
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