What I love about entrepreneurs is that they always find opportunity in adversity, and this statement is most evident in the Covid-19 crisis. Over the first two months of the global epidemic, thousands of businesses have shuttered while many have evolved. One of the most attractive business opportunities is online personal protection equipment (“PPE”) companies. This article will provide you with everything you need to know to comply with sales tax in your new online PPE business.
Step 1: Determine Sales Tax Nexus for Your PPE Business
The definition of sales tax nexus is the business activity connection a company has with a state. This connection or nexus to a state legally requires the company to collect and remit sales tax. There are many ways that a company can create nexus to a state. However, the two most common forms of nexus are physical and economic nexus.
How to determine physical sales tax nexus?
Physical nexus occurs when a company has employees, property, inventory, or substantial business activity in the state. The term “employees” can be construed broadly by many states and can include contractors. The type of business activity that the contractor performs can also be a factor in determining nexus. Property is construed narrowly by most states and will include company equipment, office space, or inventory. Inventory will create physical nexus within a state, even if the inventory is stored in a public warehouse. If you sell products through Amazon FBA, Amazon stores your products in locations across the US, and this creates nexus as well. Finally, other activities can create physical nexus, such as delivering inventory into a state with a company-owned vehicle. Business owners should complete a thorough analysis of business activities to ensure physical nexus is covered.
How to determine economic sales tax nexus?
In 2018 the United States (“US”) Supreme Court ruled in favor of South Dakota in a landmark case that changed the landscape of sales tax in the US. In South Dakota v. Wayfair, the court determined that South Dakota’s economic standard was not unconstitutional and did not violate the US Commerce Clause. Economic nexus defines as the volume of sales activity into a state based on dollar or transaction count. The court established a reasonable standard of $100,000 or 200 transactions. Since June 2018, every state except Florida and Missouri have established economic nexus rules. Although most states adopted the court’s standard, there are many variances in the definition of sales, the dollar amounts, and when a company must begin to collect sales tax. Economic nexus is a bright-line test. Business owners must be mindful of when they exceed a state’s threshold and be prepared to collect sales tax immediately.
Although physical and economic nexus is the most common form of nexus, companies should be aware of other types of nexus such as affiliate, cookie, and marketplace nexus. Accurately determining which states your company has nexus in is the first step for sales tax compliance.
Step 2: Determine How Sales Tax Applies to PPE
PPE is a term that broadly defines various types of equipment used to protect individuals from hazards in and outside of the workplace. PPE includes masks, goggles, gloves, outerwear, gowns, safety shoes, respirators, face shields, and the like. There is an assumption that PPE is exempt in many states. This derives from the fact that many of the businesses that purchase PPE are exempt from sales tax, such as hospitals or government agencies. The reason these transactions are exempt is that the entity purchasing the items has an exempt entity certificate. In general, PPE is taxable as the sale of tangible personal property. However, there are many exemptions, and there is confusion as to if PPE is exempt under certain state clothing exemptions.
First, there are states that tax clothing and have no exemptions for PPE, such as Florida. In these states, PPE is presumed taxable. However, during the clothing sales tax holidays, Florida has chosen to tax certain safety items and exempt others. For example, surgical gloves are taxable, but work gloves are exempt. Since many new PPE companies cannot change their systems for sales tax holidays, they will default to continue to tax all PPE in a state such as Florida.
Secondly, there are states that tax clothing, but have specific exemptions for safety apparel, such as Connecticut. Safety apparel defines as “any item of clothing or protective equipment worn by an employee for protection during the course of the employee’s employment.” This includes goggles/safety glasses, face shields/masks, respirators, gloves, filtering face masks, protective aprons, encapsulating chemical protective suits. Connecticut is very specific that the item is used for work. The state makes a point that if single consumers use the item, the item is taxable. PPE companies selling into Connecticut should charge and collect sales tax to individual consumers buying for individual use.
Third, there are states that exempt clothing (not including PPE), but have additional exemptions for PPE, such as New Jersey. New Jersey specifically exempts clothing, but they also exclude protective wear in general within the clothing exemption. However, they have a specific exemption for protective wear “when purchased for the daily work of the user and worn as part of a work uniform or work clothing.” New Jersey also clarifies that protective equipment is taxable when worn for general use. This would imply sales to consumers for personal use is taxable.
The taxation of PPE is very, very complicated. Once you have determined In what states you need to collect sales tax, you must make sure you are applying the tax rules to that state correctly.
Step 3: Establish a Process to Gather and Store Exemption Certificates
If you are selling PPE, you will be dealing with many businesses that can purchase their PPE tax-exempt, such as hospitals and government agencies. Tax-exempt certificates must be received before invoicing your customers. When certificates are received, they should be reviewed for accuracy and stored in a secure location. The certificates will need to be provided during any future sales tax audits. Do not assume all medical facilities are exempt from sales tax. If an exemption certificate is not received from a customer, sales tax should be charged. Sales tax certificates expire in certain states. You should be aware of these states and their rules to ensure compliance. There are several technology solutions to help companies gather, store, and manage exemption certificates.
Step 4: Determine If a Tax Technology Solution Is Required
For most start-up online PPE businesses, the number of states in which they will need to collect sales tax may be minimal. In this case, a technology solution may not be necessary. At some point, as your business or nexus footprint grows, this may become unmanageable. There are numerous technology solutions that plug into most e-commerce platforms and will streamline this process. Some of these solutions also offer an exemption certificate management module.
Step 5: Register with Each State and File Sales Tax Returns
The final step is to register in each state where sales tax nexus has been determined. The registration process can be completed online. Certain states issue a sales tax identification number immediately, while other states can take up to two weeks. Sales tax identification numbers are needed to file sales tax returns, but not needed before collecting sales tax. Some states may require a company to register as a foreign entity with the secretary of state prior to registering the company for sales tax.
PMBA offers an affordable and extensive solution to online PPE businesses. We have the most comprehensive 50-state matrix available for PPE and can provide assistance with all five steps. We also offer these services individually. Our team is certified as an implementation specialist for certain technology solutions. Contact us today for a free consultation.