What States Allow A Business Without Physical Presence?

As technology advancements increase, more and more businesses are opting for online sales channels instead of brick-and-mortar storefronts. This has led to the establishment of e-commerce businesses with no physical presence in any state of the US.

The business world is changing rapidly, and with that comes the need for updated legislation to accommodate these changes. This means new laws to allow companies without a physical presence to operate and avoid unnecessary tax obligations in states where they do not have a physical address.

In today’s modern era, small businesses owners often don’t have enough capital to invest in renting or buying commercial spaces, leaving them to explore alternate options when it comes to running their operation. Knowing which states permit virtual businesses can make all the difference in setting up and operating your business smoothly.

“The future of commerce is digital, and the pandemic only proved how agile our economy needs to be to adapt quickly and efficiently to circumstances beyond our control.” -Robbie Kellman Baxter

If you’re thinking about starting an eCommerce business, establishing a virtual storefront might just be your ideal solution. Read on to find out which states allow businesses to operate without a physical presence!

Understanding Economic Nexus Laws

Economic nexus laws are a new trend that many states have adopted. Economic nexus is the concept where businesses must collect and remit state sales tax when they reach a specific threshold of economic activity in a state, even if the business does not have physical presence in the state.

Definition of Economic Nexus

The definition of economic nexus varies by state, but it generally refers to the minimum amount of sales or transactions with customers in a state before a business has an obligation to collect and remit sales tax on their behalf.

An increasing number of states are adopting this approach, as more and more commerce is taking place online. These changes help ensure that states can collect taxes from out-of-state sellers who benefit from substantial commercial activities within their borders.

Examples of Economic Nexus Thresholds

In most states, the threshold for economic nexus is based on sales revenue, transaction volume, or a combination of both. For instance:

• Texas requires out-of-state retailers to start collection and remittance if they have over $500,000 in Texas sales per year.
• New York considers any business selling over $300,000 or delivering products into the state at least100 times annually to have established nexus.
• In Alabama, only those retailers who sell more than $250,000 annually or complete more than 200 transactions will be required to obtain special licensing and submit returns.

These thresholds differ across different states and industries. It’s essential to stay up-to-date with changing standards in your targeted markets to avoid penalties and fees.

Implications of Economic Nexus for Businesses

Economic nexus rules change the way businesses operate because they require companies to track sales and purchases on a state-by-state basis. It means that businesses have more challenges because they need to be aware of the state’s laws where their customers live or conduct business transactions.

If your company has had nexus in many areas but hasn’t been collecting tax, there is a chance you could owe back taxes, interest, or penalties. Economic nexus could also alter how businesses structure their operations, such as targeting new markets that have lower economic threshold limits, charging higher prices to cover additional costs, or even relocating certain branches of their business to minimize tax compliance burdens.

“Nexus can materially change supply chain decisions and shipping strategies for sellers and may affect decision-making regarding outsourcing international fulfillment,” said Michael Lander, founder and CEO of consulting firm, Lander Advisors.

It’s essential to keep up-to-date with the evolving rules around economic nexus to ensure full tax compliance within all states where you sell your products/services. Doing so will avoid costly fines and penalties that put pressure on your business’ bottom line.

List of States Without Physical Presence Requirement

As e-commerce sales have dramatically increased over the past years, businesses have faced new challenges regarding sales tax collection and remitting. The physical presence requirement for sales tax collection was established back in 1992 when online commerce wasn’t a reality. This rule required businesses to collect and forward sales taxes only from states they have a physical presence or nexus. However, after several Supreme Court cases, many states enacted laws that pushed traditional limits on state authority over remote vendors without physical presence. Currently, eight US states do not require sellers to meet the physical presence test to be subject to their sales tax rules.

• Alabama
• Connecticut
• Georgia
• Hawaii
• Illinois
• Indiana
• Kentucky
• Maine

It is important to note that some of these states have different criteria for determining whether a seller must comply with their sales tax rules. For instance, Illinois defines an in-state retailer as anyone who makes at least $100,000 of revenue from Illinois customers’ sales, has more than 200 separate transactions among customers located in Illinois during the year, or uses software in connection with customers located within the borders of Illinois.

Overview of States Without Physical Presence Requirement

The following are the brief descriptions and notable provisions of each state that abandoned the “physical presence” standard:

“Hawaii doesn’t have a threshold amount; so regardless if you sell even one item into Hawaii, you’re legally obligated to pay GET (Hawaii’s combined excise/general excise tax) there.” -Avalara

In Alabama, starting October 1, 2018, any seller who makes over $250,000 in retail sales to Alabama customers or conducts more than 200 separate transactions annually must register for a sales tax account and remit the appropriate state and local sales taxes on all taxable sales.

“In Connecticut, if you have economic nexus with the state and are not registered, there is an automatic fine of $500.” -Avalara

Connecticut triggers their sales tax collection law when your gross receipts totaled $100,000 or more during the previous calendar year or current calendar year. Additionally, businesses shipping products to Kentucky are subject to the state’s use tax laws regardless of their physical presence, according to the Kentucky Department of Revenue.

“Illinois’ law governing marketplace facilitator electronic commerce has made them one of the most aggressive states regarding sales tax obligations.” -KPMG

Illinois requires out-of-state sellers who meet specific thresholds like selling $100,000 or more in Illinois, or making at least 200 transactions in the state, or operating as part of a consolidated group that includes another member maintaining a distribution center, warehouse, office, or similar place of business within Illinois to collect sales tax and file returns starting October 1, 2020.

Criteria for Sales Tax Collection in States Without Physical Presence

Each state has different criteria used to determine whether a remote retailer without a physical presence meets the threshold of “economic nexus” and thus liable to their state taxing authority:

“Georgia has been especially insistent that they expect compliance from companies doing business in Georgia.” -Sales Tax Institute

• Alabama: More than $250,000 in annual sales into the state.
• Connecticut: Gross receipts totaling $100,000 or more during the previous calendar year or current calendar year.
• Georgia: $100,000 in gross revenue processed from Georgia customers during any consecutive 12-month period.
• Hawaii: No threshold amount; every retailer is required to collect GET on all sales into Hawaii.
• Illinois: Selling $100,000 or more in Illinois or making at least 200 transactions in the state. You are accountable for triggering nexus if you use Illinois-based marketplaces like eBay and Amazon.
• Indiana: Gross sales of products or services delivered into Indiana that exceed $100,000, or has two hundred or more separate transactions into Indiana.
• Kentucky: The “South Dakota law” standard which requires businesses with over $100,000 or 200 transactions in Kentucky sales annually must collect and remit sales tax.
• Maine: $100,000 in annual Maine revenue OR more than either 200 sales transactions into Maine or delivery of goods into Maine in at least 2,000 different transactions.

Taking compliance measures can be the best route for a business operating remotely as each state has their own set of rules regarding sales tax policies and enforcement. With implementing online software solutions like Avalara, TaxJar, and Vertex, merchants can save time while ensuring they always remain compliant with the ever-changing state sales tax regulations.

Impact of Supreme Court’s South Dakota v. Wayfair Decision

Background of South Dakota v. Wayfair Case

The South Dakota v. Wayfair case is a landmark decision by the US Supreme Court to allow states to require online retailers without a physical presence in their state, to collect and remit sales tax.

Prior to this decision, states were only allowed to require companies with a physical presence within their borders, such as stores or warehouses, to collect sales tax. This created an imbalance of power between brick-and-mortar businesses and online retailers, who were able to offer lower prices due to not having to charge sales tax.

“This ruling finally levels the playing field for Main Street businesses across our country that have been undercut by out-of-state online sellers for far too long.” – Matthew Shay, President and CEO of the National Retail Federation

Changes in Sales Tax Collection Laws After Wayfair Decision

The Wayfair decision overturned previous legal precedent set by the 1992 Quill Corp. v. North Dakota case, which had established the “physical presence” rule for sales tax collection. As a result, many states have passed laws that require remote sellers to collect sales tax if they exceed certain thresholds, such as a specified amount of annual sales or number of transactions in the state.

As of 2021, over 30 states now have economic nexus laws in place, which mandate that even small online sellers must collect sales taxes on items sold to customers within the state. The specifics of these laws vary by state, but non-compliance can lead to fines and penalties.

“The good news is 37 states either follow the Wayfair standard or will soon implement that policy, so we’re seeing great progress there.” – Arie Lipsky, Partner at Honigman LLP

Impact on Small and Large Businesses

The Wayfair decision has had a significant impact on both small and large businesses. Small businesses, specifically those without resources to navigate the complex sales tax laws across multiple states, have faced new challenges in compliance and competitiveness.

In contrast, larger e-commerce companies like Amazon already had processes in place to collect and remit sales taxes, making it easier for them to comply with state regulations. However, these taxes could still be a significant financial burden for businesses of all sizes that sell across many states.

“The court’s recognition of the South Dakota law’s ‘small seller’ exception is also critically important as it will prevent excessive regulation on startups and small businesses with less than $100,000 in annual sales or fewer than 200 transactions.” – John Drechny, CEO of the Trade Alliance to Promote Prosperity

The Supreme Court’s decision in the South Dakota v. Wayfair case has significantly impacted how online retailers are required to collect and remit sales tax across different states. While this creates complexity for small businesses operating across several states, it levels the playing field for brick-and-mortar stores who previously had a disadvantage due to not having an online presence. Compliance with these changes is essential for keeping a company above board and avoiding legal issues down the line.

Criteria for Sales Tax Collection in States Without Physical Presence

In the past, a business needed to have a physical presence in a state in order for that state to enforce sales tax collection. However, since the landmark Supreme Court case of South Dakota v.Wayfair in 2018, this requirement was overturned and now businesses may be required to collect and remit sales taxes in states where they do not have a physical presence, depending on certain criteria.

The criteria vary from state to state but typically include a monetary threshold for economic nexus, transactional thresholds, or other specific activities within the state that create what is known as “substantial presence”. The purpose of these requirements is to prevent out-of-state sellers from having an unfair advantage over local brick-and-mortar stores.

Thresholds for Economic Nexus in Different States

Economic nexus refers to a seller’s level of business activity in a given state that triggers the obligation to collect and remit applicable sales tax. Each state sets its own economic nexus standards, which can dramatically affect whether a company doing business online must pay sales taxes across numerous jurisdictions.

For example, in Alabama, a company has to collect and pay sales tax if it sells more than 250 “marketplace facilitator” transactions with an accumulated $250,000 or greater revenue per year in Alabama., whereas, Arizona recently revised legislation mandating remote retailers (with no physical presence) to register and remit taxes if they acquire over $100,000 in gross receipts or 200 separate transactions annually. This variation makes it challenging for multi-state companies to determine their obligations accurately without expertise or technology tools like automated sales tax software, accounting solutions, or third-party providers who assist them.

Types of Transactions That Trigger Economic Nexus

Transactional thresholds refer to the quantity or value of sales in a specific state that triggers economic nexus. These vary from a set number or dollar amount of transactions, making use of marketplace facilitators or other third-party entities, utilizing drop-shipping suppliers within a state, or streaming services.

For instance, in Colorado, it is enough for a company to achieve $100,000 in sales or 200 transactions through any revenue channels to trigger economic nexus. On the other hand, in Mississippi, the threshold is remarkably lower- with just over $250,000 in gross sales during the previous year leading you there.

Exemptions for Small Businesses

Small businesses may be disadvantaged when following such requirements concerning collecting taxes in several states without physical presence. However, many states exempt small sellers and those below basic thresholds from tax collection responsibilities, these exemptions were made precisely so mom-and-pop operations would not have to deal with excess charges.

For example, Massachusetts has zero transaction volume for companies that have up to $500,000 in annual taxable sales, and there are numerous exemptions available for remote vendors’ benefit earning less than $100,000 in retail sale per year to Arizona customers.

Penalties for Non-Compliance

Inconsistent with federal law under Wayfair, any failure to comply with these policies beyond 2020 could result in problems like fines and prosecution from regulatory agencies or possibly nominal court trials depending on the severity of each rule violation.

The penalties assigned can include severe late fees, interest accrued on outstanding payments, suspension or revocation of business permits, licenses & certificates including criminal charges if attempted evasion was deemed as deliberate. For instance, Washington D.C. imposed additional administrative rate interests based upon unsettled tax sums raised by enforcement methods.

“Any corporate entity doing business across state lines has to stay informed and might need the expertise of tax professionals in this field to avoid potential ramifications from non-compliance issues.” -Karen Monroe, Finance Expert

It is essential for companies selling products or services across states to be mindful of their responsibilities. While the specifications differ between each state, not meeting them could lead you to legal problems that result in hefty penalties, significant financial losses, and even the risk of ending up with less revenue than originally anticipated.

How to Determine If Your Business Has Economic Nexus in a State

Economic nexus is defined as a business having a substantial economic connection with a particular state that requires them to pay taxes in that state. This concept has become increasingly important since the Supreme Court ruling on South Dakota v. Wayfair, Inc., which overturned the previous physical presence standard.

Steps to Analyze Your Business Activities in Different States

One of the first steps in determining if your business has economic nexus in a state is to analyze your business activities in different states. This analysis should include:

• The level of sales you have in each state
• The amount of revenue generated from those sales
• The number of transactions made in each state
• The type of product or service you are selling

If your business meets certain thresholds for any of these factors, it may be subject to collecting and remitting sales tax in that state.

Use of Software and Services to Determine Economic Nexus

Another way to determine economic nexus is through the use of software and services designed specifically to help businesses comply with state and local tax laws. Some popular options include:

• Tax automation platforms like Avalara and TaxJar
• Data analytics tools like Vertex
• Sales and use tax consultants who can guide you through complex regulations and compliance requirements

These tools can streamline the process of identifying where you have economic nexus and what the appropriate tax rates and rules are in each state.

Consultation with Tax Professionals

Working directly with a tax professional is another effective method for determining economic nexus. An accountant or tax expert can perform a thorough analysis of your business activities and provide guidance on compliance requirements for each state in which you do business.

“It’s always better to be safe than sorry when it comes to sales tax compliance. By consulting with a knowledgeable professional, you can avoid costly penalties and ensure that you are in full compliance with state and local regulations.” -Karen Armstrong, CPA

In addition to identifying where you have economic nexus, a tax professional can also help you stay up-to-date with changes in tax laws and filing deadlines, ensuring that your business stays compliant over time.

Understanding the concept of economic nexus is crucial for businesses selling across multiple states. By analyzing your business activities, using software and services designed for state and local tax compliance, and working directly with tax professionals, you can ensure that your business stays in compliance and avoids penalties related to non-compliance.

Benefits and Risks of Operating a Business Without Physical Presence

A physical presence in multiple states is no longer required for businesses to conduct operations. However, this can present both advantages and disadvantages for business owners.

Advantages of Not Having Physical Presence in Different States

The most obvious benefit of not having a physical presence in different states is cost savings. Renting or owning a commercial property can be expensive, especially if the business does not have significant sales volume in that state. By eliminating these expenses, businesses can allocate those funds towards other areas such as marketing, customer service, research, or technology upgrades.

Another advantage is greater flexibility in where an employee can work. Remote work arrangements are increasing in popularity, which means businesses can hire top talent from all over the country without needing to open additional offices or rent more space. This also allows business owners to cast a wider net when looking to bring on new employees.

Risks of Not Complying with Economic Nexus Laws

With the rise of e-commerce, many states have implemented economic nexus laws that require businesses to collect and remit sales tax even if they don’t have a physical presence in that state. Ignoring these laws can result in penalties, fines, and potential legal action. It’s important to stay up-to-date with the latest legislative changes regarding the collection and payment of sales tax to avoid risking non-compliance and the consequences that come with it.

Impact on Business Operations and Costs

Not having a physical presence in some states can also make conducting certain types of business difficult. For example, if a product needs to be inspected or installed, it may be necessary to send an employee from another location to fulfill those tasks, resulting in additional travel costs.

Additionally, not having a physical presence can make it more challenging to establish and maintain relationships with customers or suppliers in those states. Businesses will need to rely heavily on technological tools such as video conferencing, email, and online chat to interact with these parties.

Compliance Strategies for Businesses Without Physical Presence

The most effective strategy for businesses operating in multiple states without a physical presence is staying informed about the latest laws and regulations. Consulting with tax specialists and other legal professionals can help navigate compliance issues regarding economic nexus laws.

Beyond this, investing in technology platforms that facilitate remote working arrangements, like virtual private networks (VPNs) or collaboration software, can help support workforces that are distributed across multiple locations. Additionally, incorporating key performance indicators (KPIs) that monitor employee productivity and business outcomes can ensure all areas of the organization are hitting their targets even when they are physically dispersed.

“The companies that survive longest are the ones that work out what they uniquely can give to the world—not just growth or money but their excellence, their respect for others, or their ability to make people happy. Some call those things a soul.” -Charles Handy

There are both benefits and risks associated with operating a business without a physical presence in certain states. While cost savings and greater flexibility may be significant advantages, non-compliance with economic nexus laws can bring penalties and fines. It’s important for businesses to stay informed about the latest laws and regulations while also investing in technologies that empower remote workers and improve organizational efficiency despite being in disparate locations.

Frequently Asked Questions