A half a dozen times a week, we get asked the same question: how do sales tax and nexus affect print-on-demand services? As an industry with a complex inventory and sales structure, print on demand sales tax is heavily impacted by the state tax guidelines established by Wayfair.
But first, let's review what print-on-demand services is. It’s a process of customizing white-label products with your brand and your designs through an online supplier. Companies like Printful, Zazzle, Red Bubble, to name a few, reduce risk and inventory overhead for online sellers by only printing products when customers order them.
While this is convenient, sellers that utilize these services are in a grey area when it comes to nexus.
If the seller is hosting a website and making the sale, but a supplier is fulfilling the orders and holding the inventory, who’s responsible for the sales tax?
Of course, the answer to that question is: it depends.
Determining Economic Nexus
If you’re utilizing print on demand, you need to address how nexus affects you and your business.
Nexus is determined in a couple of different ways.
One way is physical nexus, when you have a place of business in a state. This means if you have employees, inventory, digital products or software within a state, you’ll be responsible for sales tax there. If you expand operations and have any of these things in another state, that can give you physical nexus in that new state.
The other kind of nexus is economic nexus. And this is pretty new. Last year in South Dakota v. Wayfair, a Supreme Court decision ruled that there are now economic nexus thresholds across almost every state.
The average threshold is about one hundred thousand dollars of sales or two hundred transactions within a state. And that's for individual states. It's not if you have a hundred thousand dollars combined. It’s within each state.
Let's say you’re located in Louisiana and your print-on-demand service company is located in North Carolina. Does that give you physical nexus in North Carolina? No, it doesn't. You don't have any presence there. You don't have inventory, employees, office buildings or anything that physically ties you to that state. There's nothing there that could be physical nexus.
But economic nexus? You could potentially have economic nexus in any state depending upon the level of sales in each of those states. If you’re utilizing print on demand services, you need to be cognizant of how many sales you're doing in each individual state.
Once you reach the state's threshold for economic nexus, you need to register for sales tax. To avoid the danger of audits and owed sales tax, it’s important to keep track of all of your print on demand sales. This information should be in reports that your print on demand service provider can give you.
Managing Print on Demand Sales Tax
When a lot of people start using these services, they quickly realize that the search bar is charging you as the vendor sales tax. Or they are requesting from you a resale or an exemption certificate.
The question is: Do you need one? Why would you need one? And why is it important?
Your supplier is going to charge a sales tax or collect their certificate from you because your providers and your suppliers have been under many different sales tax audits before. And they know that to eliminate their sales tax liability they either need to collect the sales tax from you or they need you to give them a resell or exemption certificate.
You can do this in two ways.
First, you can either pay the print on demand sales tax out of your own pocket to your provider. (Unless you're obviously registered in a state where you're collecting the sales tax.)
Then you don't have to worry about it anymore, because it is now their responsibility to remit the sales tax. What we’ve seen a lot of our clients do is pad the price. They raise the price of their product by a few cents to cover the tax.
This works because a lot of times they don't have economic nexus in the state, so it doesn't make sense to register there. This is important because in order to get a resell or exemption certificate in the state you typically need to be registered there. And you then have to give your tax ID number to your print on demand supplier.
One downside of this method is that it puts an added burden on you because the reselling exemption certificate places the burden on you to collect the tax by yourself.
So now you're responsible for collecting the sales tax and remitting it to each state where you're registered in. When you have nexus in a number of states, that can get pretty costly and become a logistical nightmare.
The second approach to handling print on demand sales tax is to outsource. You could use an automated service or sales tax consultants. This frees you up from the responsibility of managing your sales tax, so you can focus on running your business. With a sales tax consultant or service, you can easily file sales tax returns and worry less about tracking your sales tax.
It’s best practice to review your situation with a sales tax consultant or account to get advice tailored to your situation. Going through a formal Nexus and taxability review can catch any unexpected taxability or liabilities before they become a problem. These types of reviews will comprehensively examine your potential physical or economic nexus in every state. You'll then receive recommendations as to where you should register.
This process provides an easy and effective way to identify where you should register, how you should do it and who you should work with.
Navigating print on demand sales tax can be complex. But with a comprehensive approach to handle nexus and sales tax tracking, you can avoid missed nexus liability and tax audits.
Need help with your print on demand sales tax? We can help. Click here to set up your free 45-minute consulting session with Peisner Johnson's sales tax experts today!