Question 1

Should a business (register for sales/use taxes) also register with the Secretary of State for the same state?

Accepted Answer

By Allan Lau
Date: September 23, 2020
 
First of all, let me put in my legal disclaimer: While I am an expert in the sales/use tax areas with nearly 20 years of relevant experiences, I cannot say the same with respect to the Secretary of State registrations. Therefore, you should always consult your legal department or another third party with expertise in the Secretary of State registrations before making any final decision of whether to register with the Secretary of State in a given state.
 
Now, with the legal disclaimer clearly stated up front, I can get into the deeper discussions: Why am I bringing up this topic with the answer now being so obvious to you? It is because businesses are now increasingly facing with this very same question. Ever since the US Supreme Court made a decision on the Wayfair case in June 2018, states are enacting new laws based on economic nexus which makes more businesses required to register with the states for sales/use tax purposes. These businesses, especially the online businesses, are now asking this exact question: Do I also need to register with the Secretary of State?
 
More specifically, the people asking this exact question are the CFOs, the controllers, the VPs of finances, and the accountants – the people with extensive financial reporting backgrounds but perhaps not so much on the legal aspect of the businesses. But they know the costs of compliance can slowly add up to a significant amount. If a business has to pay between $100 and $200 per state per year for annual report filing, it could add up to between $5,000 and $10,000 per year if a business has to register with the Secretary of State for all 50 states. That could be a lot of money for an online business with, let’s say, annual revenues of less than $5 million. Thus, it is a relevant question to ask and the answer may not always be as readily available to them.
 
I work with many clients over the course of many years in the sales/use tax areas, and lots of clients have come up to me and asked this exact question. And this happened many times even before the Wayfair decision came out…. Well, I need no more justifications to answer this question, and let me go deeper into this issue.
 
First of all, the requirements to register with a state for sales/use tax purposes are different than the requirements to register with the Secretary of State. The requirements to register with the states for sales/use tax purposes are primarily based on the physical presence and economic nexus standards, and these requirements are typically administered by the Department of Revenue or Taxation of the states. On the other hand, registration with the Secretary of State is administered typically by a totally different state agency – which is the Secretary of State for most of the states. (A few of my clients did not know two different state agencies administer these things.) Thus, there are two different sets of laws being administered by two different state agencies.
 
Let’s take the state of Missouri as an example. Missouri is one of the very few states that have not enacted new laws on economic nexus as of the date of this writing, and thus the requirements for businesses to register with Missouri for sales/use tax purposes is still primarily based on the physical presence standard. For sales tax practitioners, this is nothing new. But let’s also look at Missouri Revised Statutes Section 351.572 in its entirety:
 
351.572. 1. A foreign corporation may not transact business in this state until it obtains a certificate of authority from the secretary of state.
2. The following activities, among others, do not constitute transacting business within the meaning of subsection 1 of this section:
(1) Maintaining, defending, or settling any proceeding;
(2) Holding meetings of the board of directors or shareholders or carrying on other activities concerning internal corporate affairs;
(3) Maintaining bank accounts;
(4) Maintaining offices or agencies for the transfer, exchange, and registration of the corporation's own securities or maintaining trustees or depositories with respect to those securities;
(5) Creating or acquiring indebtedness, mortgages, and security interests in real or personal property;
(6) Securing or collecting debts or enforcing mortgages and security interests in property securing the debts;
(7) Conducting an isolated transaction that is completed within thirty days and that is not one in the course of repeated transactions of a like nature;
(8) Transacting business in interstate commerce.
3. The list of activities in subsection 2 of this section is not exhaustive.
 
So if your online business is selling directly to Missouri customers and you have nothing else involved with the state of Missouri, you may be thinking “I don’t need to register with the Missouri Secretary of State, do I?” After all, it appears that if your business is only “transacting business in interstate commerce”, you probably don’t need to register with the Missouri Secretary of State as a foreign corporation. It looks like it to me, but I will refer you back to the disclaimer I stated up front: You should always consult your legal department or another third party with expertise in the Secretary of State registrations before making any final decision of whether to register with the Secretary of State in a given state.
 
And this is just for the state of Missouri. Other states have their own statutes defining their requirements to register with the Secretary of State before allowing businesses to transact business in the states.
 
Okay, I’m done digging deeper for now. I hope this illustrates the complexities involved with the decision to register with the Secretary of State for many businesses, especially for out-of-state online businesses.
 
Author:  Allan Lau is a sales/use tax expert with relevant experiences for nearly 20 years.  If you have any other questions, please feel free to reach out to him in the “Contact Me” section of the website.

Question 2

Online businesses beware: You may need to register in more states for sales/use tax purposes than you think

Accepted Answer

By Allan Lau
Date: October 29, 2020
Back in 2017, if your company is an e-commerce business selling merchandise online, you may avoid the need to register with a state for sales tax, as long as your company is able to somehow avoid having established any physical presence in the state.  But in 2020, that is no longer the case.  What a difference a few years can make!
In June 21, 2018, the US Supreme Court made a landmark decision in the Wayfair case that allow the state of South Dakota to require an online seller to register, collect, and remit sales tax to the state, as long as the online seller exceeds $100,000 in in-state sales or 200 in in-state sales transactions in a given year.  Since then, the vast majority of the states (except Florida, Missouri, and Puerto Rico as of the date of this writing) have enacted similar laws to South Dakota in requiring sellers to register for sales tax based on this economic nexus. 
So what does this mean for online businesses?  While the sales threshold and the transactions threshold may vary depending on the state, the vast majority of the states have adopted the sales threshold to be $100,000 and the transactions threshold to be 200 (but see, for example, California has adopted only the sales threshold to be $500,000 and without any transaction threshold).  Thus, if your online business is selling more than $100,000 or more than 200 transactions to a state in a given calendar year, then your company will most likely be required by that state to register, collect, and remit sales tax. 
And if your company is not currently registering with a state for sales tax but your company is currently selling to customers in that state, your company will need to continue monitoring the sales and the transactions count until one of the thresholds is exceeded, and then your company will likely be required to register for sales tax in that state.
There is also another major change in the sales/use tax world in the last 2-3 years.  Many online businesses are selling their merchandise through marketplace facilitators such as Amazon and eBay.  And the vast majority of the states (except Florida, Kansas, and Missouri as of the date of this writing) have now enacted marketplace facilitator laws that require marketplace facilitators such as Amazon and eBay to collect and remit sales tax directly to the states, even though the sales are made by remote sellers such as your online businesses. 
So what does this mean for online businesses?  Perhaps this means less sales/use tax compliance headaches for online businesses – as the compliance burden is shifted to the marketplace facilitators.  But many online businesses are selling through several channels, including Amazon, eBay, Walmart, their own websites, and their brick and mortar stores.  Some of the sales may have sales tax collected and remitted by the marketplace facilitators, while other sales may need to be reported and sales tax remitted on its own.  For these online businesses, you will need to ensure proper reporting to the state taxing authorities so that no underpayment or double payment of sales tax are being made.
Author:  Allan Lau is a sales/use tax expert with relevant experiences for nearly 20 years.  If you have any other questions, please feel free to reach out to him in the “Contact Me” section of the website.

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