In this episode of the eCommerce Lifestyle podcast, Anton answers a question about sales tax that came up after the South Dakota vs. Wayfair ruling in the Supreme Court.
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Yo, what's up, everybody? Anton Kraly here from ecommercelifestyle.com, and welcome to another episode of the eCommerce Lifestyle Podcast. I'm recording this one today from the office, not usual like from the car. The reason I wanted to hop on here real quick, just a super short episode, is to address a question that came up in our private Facebook community for students of my ecommerce training program called Drop Ship Lifestyle. The question that came up is something that I'm sure everyone will at least think about as they're starting their business or as they're reaching out to suppliers or as they're forming everything legally.
The question was basically this person asking what they should do because they applied for a supplier that they wanted to work with, and the supplier emailed them back and asked them for resale certificates, so sales tax certificates, for every state that they're going to ship to. They said, "Listen, is this common? What should I do? Do I have to do this?" I'm going to start, I'll answer the question, but before I do, just gotta make my normal disclaimer that I'm not an accountant, I'm not a lawyer, so if you want professional advice on this, then you should call a tax lawyer or an accountant and see what they have to say. What I will do is explain this from my understanding, again, as someone that's not a professional. I'm not certified to do this stuff, and then I'll link to two articles that I think will help you understand what's happening right now at the time I'm recording this in, what is it, March of 2019 in regards to sales tax.
By the way, this is a sales tax thing. As you probably know, different states have different sales tax laws. Some states have 0% sales tax. Some have just, it's all different, basically, and not just state to state, but county to county. The actual sales tax rate could be just .01% different, but there usually is fluctuation through there.
With ecommerce businesses, online-only stores, the way traditionally that it has worked is basically if you have a business and your business is located in, let's just say New York, if you live in New York, you have a corporation or an LLC where you're doing business as a sole proprietor in New York, that would mean that you have to collect and pay sales tax on orders that ship to New York. If you had an order from New Jersey, that would mean you don't have to collect and pay sales tax on that order that ships to New Jersey because your business is located in New York, and that's if you're online.
Basically, people had been going off that, I don't, I guess advice, they've been going off that theory for as long as I can remember, since I started with ecommerce back in 2007. Now, I gotta tell you, even years ago, the term "nexus" started coming up. Basically, nexus refers to a connection that your business has with another state. There's a lot of different types of nexuses. Again, I'll post a link that has videos explaining all this, but there is a click-through nexus, there's an affiliate nexus, there's a marketplace nexus, and now, recently, the one that got people talking about this again is an economic nexus.
Now, the economic nexus is new, and this became a thing in a big Supreme Court case last year. That court case was South Dakota, so the state suing Wayfair. Wayfair.com, if you don't know them, they're a publicly-traded company. They do over a billion dollars in sales every year, and they work pretty much on the drop-ship model. A lot of the stuff they sell is drop-shipped.
Now, what happened is South Dakota saw that Wayfair was selling a bunch of stuff there, shipping a bunch of stuff there, and they wanted to say, "Hey, Wayfair, you owe us sales tax," basically. "We want to profit off of you selling to South Dakota." This went all the way up to the Supreme Court, and basically, the court found that, yeah, you should have to pay South Dakota sales tax for orders you ship there.
Now, this overruled the previous ruling from the Supreme Court that goes back to, I don't even know, it precedes this one, but the way that court rulings work is once something passes, then a precedent gets set. What that means is because Supreme Court said, "Yes, Wayfair, you have to pay sales tax to South Dakota for orders that ship to South Dakota," that means now North Dakota could say, "Hey, we want this too," and New Jersey could say, "We want this too," and other states could say, "We want this too."
Here's the thing you have to know about that. Yes, that's true, and yes, states now are starting to say that they want, basically, their money. They want companies that are online-only to collect money if the money is basically coming through orders that are going to their states. For a company like Wayfair that's a billion dollar company, this is a very real thing, and they are now collecting and paying sales tax for all these different states.
Now, what does that mean for me or what does that mean for you for a smaller company, and what does this mean for the person that posted in LABS where the supplier said, "Hey, I want a sales tax cert for every state that you're going to be shipping to." Well, again, at this point, that is not common. I haven't had any suppliers that have asked me for a sales tax certificate for every state that we ship to. It may become commonplace in the future, so if you listen to this two years from now, don't say, "Anton said we don't have to do that." I'm telling you, right now, that's not how it is.
The good news is if it becomes that way, what I really know will happen is that Shopify, which is who we use for our stores, they'll have a solution that just makes it very easy to basically collect and pay sales tax because if everybody has to do it, Shopify, I think last time they reported they have over 800,000 stores on their platform. Most are in the states. Again, if it becomes a thing, they're going to make sure that they're basically setting their merchants up for success. That's where I'm at with it now, but even with that being said, I just want to talk about why I think this is a big deal now for massive companies where it's not as much of a big deal yet, again, yet, for companies like mine and probably yours.
Economic nexus. What does that mean? I mentioned there was a whole bunch of different type of nexuses. What is an economic nexus? Well, it basically means if you have an economic interest in that state, and the way they define that is different state by state, so each state determines basically what it means to have an economic nexus there, usually, there's two factors that go into this.
Factor number one is a revenue number. I think the lowest is like $100,000 of sales in calendar year in a state. I know some of them are like $500,000. I don't ... I'll post, again, a link so you could see it state by state, but let's just say, and again, I'm making this up because I don't know the exact number, but let's just say New Jersey has an economic nexus that is now in effect because of the precedent of the South Dakota versus Wayfair, basically, ruling. What that would mean is if their economic nexus was for $500,000, if you sold over $500,000 in New Jersey in a calendar year, then you would have to basically be responsible for sales tax.
Now, I mentioned there's two things that usually go into this. One is that top-line number. The second way to determine if you have an economic nexus is above a certain order amount. I think most of them are about 200 orders. Again, think about, like you can go back and look at your last year's numbers and think about or look to see how many states you shipped to, how many orders you shipped to each state, how much revenue came in from each state, and the only ones that would even be a concern in regards to the economic nexus are the ones that were just super, super, super high. If you are having, I don't want to say this problem, but if you're in a situation where you're crossing these economic nexus thresholds, then it shouldn't be a big deal to set up sales tax there because that means you're making a lot of money and getting a lot of sales.
What I would say even if you are at that level now, talk to an accountant, see if it's worth setting it up, see if it's worth not doing it yet, see if it's worth waiting for this to really become mainstream. But that's where I'm at right now as far as where we are. I definitely do not have a sales tax cert for every state we do business in. I'm also not above the thresholds for the economic nexus kicking in, but if you want to look at it for yourself, again, I'll post two relevant articles with a bunch of videos you could check out. Don't let this deter you. If you're getting set up, don't think, "Oh, things just got so much more difficult." They didn't. Again, this only matters once you're making a lot of money, and this is something that if it happens, it's going to happen for everybody, so we'll do what we've done for the past 12 years, which is figure out how things work now, how to adapt, and how to still be number one.
Yeah. Don't freak out. Don't give up. Don't think things are too hard. Things are still easier than they ever been to get started online, which, by the way, if you haven't got started yet, go to dropshiplifestyle.com/webinar. Watch my free presentation there. You could see exactly how we do all this stuff and how to get started with building your very own highly-profitable semi-automated store. Again, it's dropshiplifestyle.com/webinar.
Check that out. With that being said, I'm going to get back to work, finish up the day. As always, if you enjoyed this episode, be sure to subscribe to eCommerce Lifestyle for all the new podcast I publish. That's it guys. Appreciate you, and I'll talk to you on the next episode. See you.