The ShipCompliant by Sovos webinar, “Don’t Panic! How to Comply With the Latest State Sales Tax Regulations” covered what sales tax regulations look like, how they have changed over the last year, and how these rules apply to wineries engaged in the direct-to-consumer (DtC) wine shipping market.
If you missed this discussion among Annie Bones and Tyler Blackney, of Wine Institute, along with ShipCompliant’s Regulatory Counsel Alex Koral, read on for a detailed recap of the information shared and their insights.
What Is Sales Tax, and How Has It Changed Recently?
Sales tax is familiar to anyone who has bought anything in the United States. As its name shows, it is a tax imposed by states on a sale of tangible personal property; when there is an exchange of goods for money, the state can require the seller to assess an additional percentage of the price of the goods, which the seller must then remit to the state.
What makes sales tax compliance difficult is that how it applies in a specific moment depends greatly on where a sale occurs. The rate of the tax (or whether there’s a tax at all) can vary greatly depending on that location. This is because many states permit local jurisdictions—counties, cities, and other “special districts”—to impose an additional tax rate.
For brick-and-mortar sellers, this complexity can be greatly diminished because they are generally dealing with only one location. However, when the seller is asked to have the purchased goods shipped to the purchaser’s address, things get tricky quickly.
The first question is whether the seller would be required to collect and remit tax at all. Whether there is a tax obligation depends on what is called “nexus,” which essentially means a sufficient connection between seller and state by which it is not unfair for the state to impose an obligation. For many years, the specific definition of nexus had been “physical presence,” meaning the seller had to be actually located in the state (though what constituted a presence had become attenuated over the years).
However, in last year’s Supreme Court decision, South Dakota v. Wayfair, the definition that many states use for nexus has expanded to include “economic” nexus. Under this definition, once a seller meets a threshold of economic connection (i.e., revenue) in a state, the state can impose a sales tax obligation. Generally this threshold is $100,000 in total retail sales, but it can vary state-by-state. (You can track what states’ economic nexus rules with this free Sovos resource.)
This change in policy has meant that many more sellers—namely Internet sellers—have tax obligations in many more states.
Once a seller has a sales tax obligation, some standard procedures should be followed.
They will first be required to register with the relevant tax authority (the Department of Revenue, or similar). Then, when a sale occurs, they will have to accurately calculate the appropriate tax rate. When a sales occurs at a brick and mortar store, the tax rate associated with that location applies. When a sale is made remotely, to be delivered to the purchaser, however, the rate will be that which is associated with the purchaser’s address. This means that remote sellers, with a greatly expanded tax liability, need to determine rates for many more locations (i.e., wherever they ship to).
(The Streamlined Sales Tax initiative aims to simplify sales tax regulations within its 24 member states. We recommend looking into this initiative find how to simplify your compliance, particularly for registrations.)
Once tax has been collected at the time of purchase, the seller must then remit it to the state, along with whatever reporting requirements the state imposes. It is critical to remit this money to the state in a timely fashion, as failure to do so can bring additional penalties, interest, or worse.
But What About Direct Shippers of Wine?
Wineries that participate in the legal DtC wine shipping market are actually well ahead of the game. This is because most states that permit DtC shipping of wine condition getting a DtC shipping license on the shipper assuming a tax liability in the state. So long before Wayfair, wineries were already complying with sales tax requirements all across the nation.
These wineries should follow the same procedures as for other taxpayers: recognize where they have a tax obligation, register to collect and remit tax, calculate and collect the correct tax, and remit it on time. At ShipCompliant, we have been supporting these requirements for nearly two decades, proving that with the proper systems, such obligations are meetable.
But there are—of course—some additional complications for wineries engaged in DtC shipping. These include recognizing if there is a special tax rate for wine (different than the general tax rate), or whether some other tax applies (for instance, in a state like New Hampshire that doesn’t have sales tax, but does impose a percentage markup on the cost of wine, which is also imposed on wine shipped DtC to the state).
Also, there are some states that do not impose sales tax obligations as a condition of being a DtC wine shipper: Minnesota, Iowa, Colorado, Missouri, and Florida. As these states pass economic nexus rules (so far Minnesota, Iowa, and Colorado), wineries that meet those states’ economic nexus thresholds will then have a sales tax obligation.
So while DtC shipping wineries may have been dealing with expanded tax obligations for many years already, it still can’t be said to be uncomplicated.
A Couple of Tricky States
In the webinar, we discussed in detail two states that present particular challenges because of their economic nexus rules.
Colorado is notorious in sales tax circles for its complexity. Since its economic nexus rules became effective on June 1, 2019, many remote sellers have had to figure out how to handle this tricky state. What makes Colorado particularly challenging is that the state divests a great deal of authority to local “home-rule” jurisdictions to enact and manage their own sales tax policies.
Colorado’s economic threshold is $100,000 of total annual retail sales, which the state defines as any sale that is not for resale—that is, sales to the final consumer. Therefore, sales by wineries to Colorado wholesalers for distribution through the state’s three-tier system will not apply to this threshold.
Currently, Colorado’s economic nexus rules only apply to “state administered” taxes, meaning only taxes handled by the state Department of Taxation, whereas “home-rule” jurisdiction taxes only apply if the seller is physically located in that jurisdiction. As an example, if you’re a remote seller shipping to Broomfield, Colorado (a home rule jurisdiction), only the state rate will apply; but if you ship to a state-administered jurisdiction then city and county rates may apply.
In addition, Colorado requires sales tax registrants to indicate each jurisdiction in which they make sales. For remote sellers, this can be anywhere in the state. As such, we recommend that when a remote seller registers for sales tax in Colorado, they select all jurisdictions (a total of 683).
California also presents a challenge—mostly in that its rules are rather new, and affect instate businesses as well (e.g., wineries located there). Effective April 25, 2019, California has established an economic nexus threshold of $500,000 in retail revenue. Any seller meeting or exceeding this threshold is required to collect all state and district taxes, based on where the purchaser takes possession of the goods. This applies to both sellers in California and outside, which is a major change for local businesses.
Previously, California businesses that shipped across the state were only required to collect the 7.25% state rate on those sales. Now, though, if they make more than $500,000 in sales in California, they will have to assess many more local, district taxes. This sets out four possible scenarios for a business selling to California:
- A California-located business that makes less than $500,000 in total California retail revenue will only need to collect local district taxes for sales made wherever they have a physical location. For any order that they ship to addresses within the state, then only the 7.25% rate will apply.
- A California-located business that makes $500,000 or more in total California retail revenue will need to collect the local district taxes on all sales they make. Sales finalized where they have a physical location will have that premises rate applied; sales shipped to other California locations will need to assess local district taxes at those locations.
- Non-California businesses that make $500,000 or more in total California retail revenue will need to collect sales tax, including all relevant local district taxes, based on the applicable rate at where they are shipping goods.
- Non-California businesses that make less than $500,000 in total California retail revenue are easy—they have no California tax obligation, and are free to ship to the state without collecting or remitting sales tax. The exception would be for non-California wineries shipping DtC to the state; these parties do have a sales tax obligation in the state, as a condition of getting a DtC shipping license. However, only the 7.25% rate will apply for all locations to which they ship.