Although one of the major themes of 2020 is remote working, retail is an industry that had adapted to remote work long before the pandemic. From Etsy craft barons to direct-to-consumer startups, retail broke out of the brick-and-mortar mold with an e-commerce boom starting in the late 1990s.
As a percentage of total retail sales, e-commerce sales have shown vigorous growth in the last decade, rising from 5.1 percent in 2007 to 13 percent in 2017. But some of that growth has been fueled by advantageous taxation practices for remote sellers, who are defined as sellers that don’t have a physical presence in a state but sell products or services for delivery there.
Ambiguity in tax laws allowed remote sellers to avoid paying sales taxes in states. However, this changed in 2018 when the United States Supreme Court declared in South Dakota v. Wayfair that individual states could require online sellers to pay state sales tax on their sales.
Under this ruling, states are able to pass laws allowing them to collect sales taxes from remote sellers. Most states have put the legal framework for this into place, including New Jersey.
To get the full picture of how sales and use tax applies to remote sellers in New Jersey, check out Eyet Law founder Matt Eyet’s comprehensive FAQ from 2019 in the prestigious Practical Law journal. Read on below for the key points.
Remote Sellers: Who Pays and For What Reason?
Particularly important to remote sellers is the concept of nexus. It’s the connection they have with a state, and it determines who pays taxes. Nexus can be the revenue a remote seller makes through sales in a state (economic nexus), a certain amount of sales referred from in-state business partners (click-through nexus), or through a party that facilitates a retail sale (marketplace nexus).
In New Jersey, there’s an economic threshold that determines economic nexus. Sellers have economic nexus if:
- The remote seller’s gross revenue from eligible sales delivered into New Jersey during the current or prior calendar year exceeds $100,000; or
- The remote seller conducted 200 or more separate eligible transactions during the current or prior calendar year.
New Jersey also has established a click-through nexus standard which creates a rebuttable presumption that a remote seller has nexus in New Jersey if that remote seller:
- Enters into an agreement to compensate a New Jersey independent contractor or representative for referring customers via a link on its website or otherwise to that out-of-state seller; and
- Has sales from referrals to customers in New Jersey over $10,000 for the prior four quarterly periods ending on the last day of March, June, September, and December.
Finally, the third type of nexus which renders a remote seller’s sales into New Jersey taxable is marketplace nexus. Importantly, in this scenario where the remote/marketplace seller makes sales through a marketplace facilitator (such as Amazon), the remote/marketplace seller doesn’t need to collect and remit sales tax as that burden falls on the marketplace facilitator. Marketplace sellers and facilitators, however, can agree to a different arrangement for the collection and remittance of sales tax.
Registration and Tax Compliance
Because of the Wayfair decision, remote sellers need to register with tax authorities in states where they have nexus for tax purposes. New Jersey is a full member of the Streamlined Sales and Use Tax Agreement, which reduces tax compliance burdens on sellers. But while tax compliance may be simplified, remote sellers need to be mindful of penalties. New Jersey imposes penalties for late filing or payment and failure to file or pay.
Remote retail is a major part of the retail economy, but just as technology shifts standards and best practices, so do tax laws. Paying state sales and use tax is part of the new normal for remote sellers.
Don’t let this change catch you off guard. For a comprehensive overview of how New Jersey sales and use tax applies to remote sellers, take a look at Matt Eyet, Esq.’s guidance for 2019, as well as an updated version for 2020 in Practical Law.
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