Managing sales tax obligations can be complex in the direct-to-consumer (DtC) alcohol beverage shipping space. Luckily, Sovos ShipCompliant’s Alex Koral, regulatory general counsel, broke down key considerations in the recent Understanding Sales Tax for the DtC Shipper webinar. Here are highlights from the presentation to help you better understand the many nuances of this tricky topic.
What is sales tax?
Sales tax is based on the value of taxable goods that are sold in an individual transaction. States require retailers to remit a percentage of the money they make from a sale of goods, but they also have the retailer collect that tax money from customers on top of the listed price of the transaction at the time of purchase, so the money ultimately comes from customer’s pockets, not the retailer. Any money that a retailer collects for sales tax must be remitted to the state on an appropriate form. Sales taxes are levied primarily on transactions of goods, but services can also be taxed in some circumstances.
In total, 45 states impose a sales tax. The five sales non-tax states are New Hampshire, Oregon, Montana, Alaska and Delaware, referred to as NOMAD states (Alaska does institute some city-level sales taxes). Beyond the state level, many local counties, cities and districts have their own tax rates and rules. There are over 12,000 local tax jurisdictions that sellers must manage.
Nexus for DtC alcohol shippers
In theory, nexus is a straightforward concept but in practice, it can make your head spin. Essentially, nexus comes down when a business has a sufficient connection to a tax jurisdiction that it appears fair for the jurisdiction to impose a tax liability on the business. In addition, the jurisdiction cannot make complying with that tax liability overly burdensome for the business. For many years, that was interpreted to mean a business had to have a physical connection—to own property or have employees in the jurisdiction. But in the 2018 case South Dakota v. Wayfair, the Supreme Court ruled that, in the age of the Internet, states could legitimately claim to have a nexus with remote sellers who earn a reasonable amount of revenue in the state, i.e., “economic nexus.” In short order, all 46 states that levy some sales tax have established economic nexus based on annual sales thresholds.
In some states, economic nexus may lead to additional obligations, as the economic nexus may establish an additional, generic tax burden not set out under the DtC shipping laws. For example, in Illinois and Louisiana, DtC shippers are only required as a condition of their license to collect the state tax; however, if the DtC shipper also has economic nexus in either state, they would then also be required to collect all applicable local taxes.
It’s extremely important to understand the rules where you have nexus, as that will establish where you are required to remit sales taxes and which tax rules will apply. Once you’ve determined the rules, you’ll be better informed of how and when to collect and remit tax on your DtC shipments. It’s also critical to not register in a state where you do not have nexus, as registering automatically obligates a business to meet all tax obligations even if they otherwise didn’t have to.
Situs for DtC alcohol shippers
DtC alcohol shippers must also understand the “situs” for their sales, which basically means what rates, rules and procedures apply to a sale. By and large, situs is determined by where the consumer takes possession of the product, which for interstate sales means the destination location. In intrastate sales, some states will say that the ship-from location is the situs location, but most are moving towards destination-based situs. So, for DtC shippers with nexus obligations in many states, this means understanding and applying the situs rules for all those many states. It is also important to realize that only one jurisdiction can tax a transaction at a time, so while you may need to report all revenue to your home state, you should make sure to deduct exports from tax sales on your home state return and not pay taxes twice.
Sales tax for DtC alcohol shippers
Almost all states require DtC shippers to pay sales and use tax. To get a DtC license, shippers must assume tax liability. This “direct-to-consumer shipper nexus” was imposed to create parity for local businesses. Seven states do not have this inherit tax obligation on direct-to-consumer shippers. If you’re selling in Alaska, Colorado, Florida, Iowa, Minnesota, Missouri, Wyoming and/or D.C., you must track your revenue to know where you might have an economic nexus.
How to manage your tax requirements
Compounding the complexity of the sales tax landscape for DtC shippers, almost everything is subject to change. States are not always diligent in informing taxpayers of changes in rates, forms and rules that might affect them. All these factors can make it seem overwhelming to manage sales tax.
This is where the right technology can help. Implementing real-time sales tax determination software that specializes in alcohol shipping can help ease the burden of keeping up with the latest sales tax rules and regulations. With real-time sales tax determination, you can rest easy knowing that you are collecting, and then remitting, the correct tax, down to the rooftop level. Having all the special rules, markups and regulations applied at the time of sale can help you ensure compliance and a smooth and seamless purchasing experience for your DtC customers. All compliance software isn’t created equal and choosing a partner that understands the intricacies and unique complications related to DtC shipping will set you up for success.
If sales tax compliance is creating an undue burden on your business, discover how easy compliance can be with the right partner.