The Makeup of Two Entrepreneurs- Chapter 3

Makeup Entrepreneurs Online Business Taxes

I don't believe I have ever placed a disclaimer BEFORE any of my blog posts, but here it goes- I am not a tax professional. Actually, I'm far from it. Until committing myself to starting the cosmetic business a few months ago, my knowledge about anything didn't extend far past eyeballs. Most of this information is newly researched as I am setting up our eCommerce platform on our website, but I wanted to put it out there since I had a good amount of difficulty locating some of this information myself. If you find some of this applies to you and you need more details please contact a tax professional!

The third chapter in our entrepreneurial series is dedicated to a topic that has been causing me to turn up the Enya and try to recall breathing techniques from yoga classes I last took 2 years ago.


Otherwise known as Buzz Killington or the Biff to my Marty McFly.

Navigating each state's business and sales tax laws has been quite the tumultuous sail for the reason that all states have different definitions of what they consider to be doing business in their region and the boom in e-commerce has blurred what activities create a significant connection (or nexus) to a state, all in turn causing this entrepreneur to be in constant reach for her wine glass. The e-commerce and affiliate-driven sales explosion over the last few years is causing states to be like, "Whoa! Where's my cash money?!" resulting in new court rulings and fickle legislation. Everyone with an online retail business needs to pay attention to each state's tax nexus requirements in order to ensure compliance and mitigate risk of fines, penalties and back taxes.

Our business, for all intents and purposes, is based in Massachusetts. Our LLC is being filed in MA making us obligated to honor all MA state business tax requirements as well as allowing us into the MA court system. However, if we conduct business in any other state then we may, by law, have to apply for a license to conduct business in that state, otherwise known as foreign qualification. By registering as a foreign entity in another state we would be responsible to also adhere to business tax laws in that state and, like in our domestic state of MA, the court system in that state would be open to us. You might be thinking "What The FICA"!! So an online business that sells to consumers in multiple states needs to register as a foreign entity in EVERY STATE!? Well, fortunately, there is the federal Interstate Income Act of 1959. This law prohibits states from imposing income tax on a business if it is merely soliciting sales then taking orders and shipping from outside that state. A nexus must exist before a state has the right to impose tax on an out-of-state business and the nexus is usually defined as having a physical or economic presence within the state. ECONOMIC PRESENCE?! If you're now thinking this is a huge pain in the ASSET ACCOUNT then you are right. Some states (like Alabama) are stating that merely having an economic presence in the state can produce nexus (and there ain't no Roll in that Tide, Bama). And, unfortunately, it appears as though this economic nexus standard is trending amongst states.

On top of making sure you are registered to conduct business in each state that you meet the requirements, you must also be cognizant of which states require an online business to collect and remit sales tax. In the glory days of  early online retail the responsibility of remitting sales tax on items bought online was left to the consumer. Well, RSS NO-SALES-TAX-HEADACHE has sailed. An online business now has to pay attention to each state's sales tax nexus statutes. And if you think determining whether you are within sales tax nexus is annoying, brace yourself. Many states have now adopted something called Click-Through Nexus. Say you have yourself a nice online boutique jewelry business based in Wisconsin and you have a hot stuff LA blogger post a few selfies of herself in your newest crystal choker. Well guess what? You now have  Click-Through Nexus in California. And while most states have established a threshold for sales carried through affiliates before you need to acquire a sales tax license in that state, Pennsylvania has not, so you need to think about that before you have any website in PA brag about your product. Most states' Click-Through Nexus thresholds are around $10,000, but some states such as Connecticut and Rhode Island have much lower thresholds. And some states such as Alabama and South Dakota have even gone a bit further in determining when a business is legally obligated to collect sales or use tax. They have adopted an annual threshold for all sales, that if met, places the business within their sales tax nexus. And in Florida,  you meet sales tax nexus requirements just from owning personal property in that state even if that property has nothing to do with your business.

Although being an online entrepreneur instantly gives your business a global audience and provides you cost effective ways to market your products, it also comes with hazy and capricious tax responsibilities. Until Congress uniforms this circus, you need to be sure to check for tax liability in each state or seek the help of a tax professional that specializes in multi-state business affairs.


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