One of the most frequent questions we get from authors is about charging sales tax on their books. Our standard response is something like, “You must consult a tax expert for definitive advice, but we know that if you have a physical presence in a state, you have established ‘nexus’ and must collect sales tax on your books.” A recent Supreme Court ruling turned that advice on its head.
In South Dakota v. Wayfair, the Supreme Court overruled two previous cases that said states couldn’t require sales tax from businesses with no physical presence in the state and upheld a South Dakota statute that requires out-of-state businesses to collect and remit sales tax if they deliver more than $100,000 of good and services to the state or engage in 200 or more separate transactions.
This ruling paves the way for other states to enact similar legislation, and over half have already done so. North Carolina, where SPARK Publications and many of clients are located, already had a law on the books but couldn’t enforce it. As of November 1, 2018, if your business is not located in North Carolina but you have annual sales in excess of $100,000 or 200 transactions with North Carolina customers, you must collect and remit sales taxes to the state of North Carolina.
We talked to our tax advisor, Jack Schmoll of Schmoll CPA, to get some more clarity on the issue of sales tax for independent authors. Unlike many accountants and bookkeepers, Jack is a sales tax specialist. He advises taxpayers as well as other CPAs and accounting firms.
What is “nexus”?
“Nexus is the minimum connection a taxpayer needs to have with a state before the taxpayer becomes subject to that state’s tax laws. And the rules vary by tax type—income tax, sales tax, franchise tax, et cetera—and by state.”
Today, we’re primarily interested in sales tax. What types of things establish sales tax nexus in a state?
“That’s where there’s a huge amount of flux right now. Historically, you needed some type of physical presence in a state, such as having inventory in the state (even through a fulfillment service like Amazon), having a sales representative who calls on customers in that state, and of course, having a brick-and-mortar presence. The US Supreme Court case South Dakota v. Wayfair established that a physical presence is no longer necessary. Each state is taking steps to enforce that court decision. More than half of states have something that’s either already in effect or will be within the next few months. It’s also important to note that the Supreme Court didn’t take away the physical presence connection; it simply added an additional threshold for sales and/or transactions. And that revenue amount ($100,000 in North Carolina) can be from any source, not just your taxable products and services. In the case of SPARK Publications book clients, if you go to a state and do a book reading or give a speech and sell some books, then you’ve most likely established nexus in that state with your physical presence and even a small amount of sales.”
How will people know when a state’s new rules are in place?
“There’s no central bank of this type of information. I update a matrix on a weekly basis that I send out to my clients that shows who has imposed what and when the effective dates are. Unfortunately, each state acts on its own. Some are establishing new laws. Others, like North Carolina, already had laws enacted and have now simply set a date for when they will begin enforcing them.”
If my customers are ordering my book online, do I charge sales tax based on where I am or where my customer is?
“‘Sourcing’ is the term states use regarding what tax rate applies, and it varies by state. If you’re mailing across state lines, the tax rate is almost always going to be the location of the customer.”
Is sales tax charged on shipping?
“Again, it varies by state. Shipping is taxed in North Carolina.”
Where do you go to find out which states use which rules?
“There is not an easy place to go for that. I have very extensive tax research software that I use to find that information. If you’re trying to find it on your own, you’ll have to look at the state’s website and possibly dig into the state’s statutes to be sure.”
If our clients came to you for help, what sorts of help can they expect?
“I help folks figure out a lot of things. Is their product taxable? Do they have a sales tax collection requirement in a particular state? If so, is shipping taxable? And then, while I don’t file their taxes or keep books for them, I do help them choose the right solutions for their situations.”
Long story short: you’re definitely responsible for collecting and remitting sales tax in your home state. And you need to keep close track of your sales thresholds and nexus status in other states.
Also note that if you’re ordering book copies from print-on-demand vendors and reselling them to your readers (the end user), then you are responsible for the sales taxes, not the printer. But they will charge you sales tax until you prove to them that you’re exempt. The first step is to complete North Carolina’s Form E-595E (or the equivalent in your state), which includes a multistate component where you can list any other states where you have sales tax nexus. Your resale ID number, which is required on the form, is the same as your North Carolina Department or Revenue account number on your Form E-500 sales and use tax return.