Some companies are required to collect sales tax on out-of-state sales due to the economic nexus laws that exist in many states. These laws create a tax obligation for businesses that have a significant economic presence in a state, even if they don't have a physical location there. The purpose of these laws is to level the playing field between online businesses and brick-and-mortar stores, ensuring a more equitable tax system.
The issue of sales tax collection for out-of-state sales gained prominence with the 2018 U.S. Supreme Court case, South Dakota v. Wayfair Inc., which overturned the previous "physical presence" rule. This rule required companies to have a physical presence, such as a store or warehouse, in a state to be required to collect sales tax on sales made within that state. The Wayfair decision established that a company's economic activity in a state, rather than its physical presence, could be enough to create a tax obligation.
Following the Wayfair decision, many states have implemented economic nexus laws based on certain thresholds, usually expressed in annual sales revenue or the number of transactions in a state. When a company exceeds those thresholds, it is required to register, collect, and remit sales tax for that state. These thresholds vary by state, and businesses need to be aware of the specific rules and requirements that apply in each jurisdiction where they have customers.
In summary, some companies must collect sales tax on out-of-state sales due to the economic nexus laws that have been enacted in many states. These laws are designed to ensure fairness in the tax system by requiring businesses to collect sales tax if they have a significant economic presence in a state, even if they don't have a physical location there. This approach balances the need to protect local businesses from unfair competition while also acknowledging the growth of e-commerce and the changing nature of modern retail transactions.
Hollis CPAs & Associates can assist with your out of state sales tax filing, including the initial state registration that is required in order to file and remit sales tax payments. We use industry leading software from Wolters Kluwer to track economic nexus, file sales tax returns, and remit payments.