Tax Ramifications of Warehouse Outsourcings

Online and virtual business that sell goods out of the state where their physical warehouse and factory are located nearly always operate their sales and logistics through multi-state and multi-country warehousing companies.

Warehousing and Fulfillment Taxes

The major advantage of using large-scale warehousing company services is the convenience for your customers and the logistics advantages for your company. The cost of real estate for warehousing inventory is high. The cost of labor involved in the warehousing, packaging, and shipping functions is also high. The cost of labor for packaging, addressing, and shipping orders is often greater than the costs involved in warehousing company costs. Fulfilment companies bundle all those costs and can provide more efficient service than most companies can provide on their own. Those advantages are basic and will never go away.

For many years doing business on an online basis had a major economic advantage. According to Supreme Court rulings in 1967 and 1992, “states may not collect taxes on sales in a state from retailers that do not have a physical presence in the state.” That was very convenient. In other words, according to these court rulings, for states to collect taxes, a company must have nexus or “substantial physical presence” within the state.

To get around the nexus requirement, in order to collect needed taxes, states have begun replacing physical nexus with “economic nexus,” defining “substantial” in economic terms rather than physical terms. If a company uses a warehousing company that operates out of a warehouse in a state, that suddenly becomes sufficient nexus for the state to begin to collect taxes from the company.

The Supreme Court also ruled that using a common carrier and mail to deliver goods between states does not constitute nexus within the destination state. If a company had its goods delivered by mail, it would not have to collect state taxes. However, if the online retail company uses a warehousing company that has a warehouse in the state, and the retailer owns property within that warehouse (which the warehousing company packages and ships on order), then the retailer is said to have sufficient nexus in the state and has to pay the state taxes.

State Sales Taxes for Warehousing and Fulfillment

Sales Tax is charged on the sale of any product or service, according to the rate the state has set, upon the products selling price.  Throughout the United States, sales tax rates vary. Some states charge high rates, some charge low rates, but may vary at the city ad county levels with additional rates added to the state rate.  There are however, five states that do not charge sales tax:

  1. Alaska
  2. Delaware
  3. Montana
  4. New Hampshire
  5. Oregon

Choosing a fulfillment company in one of these areas may benefit your bottom line. Keeping up with the different Sales Tax rates can present a myriad of problems.  Having the fulfillment company located in one of the five states that do not have a Sales Tax can eliminate collecting tax on all but those within your own state. Those living in the same state as your physical address will still have to pay the rate imposed by your state.  Less time spent with bookkeeping, can save employee cost, time, and money.  And we are all about trying to find ways to save money in our overhead.

But don’t stop here – you need to be careful in performing this analysis.  Do your homework.  Just because the state doesn’t charge a sales tax doesn’t mean it will be the lowest cost alternative. States charge a number of different types of taxes and fees outside of sales tax, and these may be passed on to you through your fulfillment company. Also, if the state isn’t strategically located for minimizing shipping, you may only be hurting your company by incurring larger shipping fees overall – more than offsetting any sales tax savings earned.

You must always make your decisions on which Fulfillment Company best fits your needs based on asking a few questions, weighing the values each bring to the table, and on good sound business practices.  Remember, it’s important to choose a company that will make a good partner, in protecting and growing your business.

Multi-State Warehouse Outsourcing

State laws regarding tax compliance and nexus are varied and confusing under the present state of affairs. If you are a company that extensively uses inter-state warehousing companies you have to take a serious and objective look at the way your inventory is handled within each state and what current state nexus laws are. In those states where you may be obligated to collect and pay state taxes, you may want to evaluate whether there is exposure for uncollected sales tax and what impact this nexus may have for future compliance.

In order to bring order to the nexus controversy the senate passed a “Marketplace Fairness Act” in 2013. This federal act requires that online companies must collect and remit state taxes in states where they do more than a million dollars in annual revenue. There is also an effort to get state agreement on a “streamlined sales and use tax” which would streamline the confusion of state tax laws. Nearly half of the states have signed on so far.

Any company that operates online and uses multi-state warehousing companies should be on the lookout for changes in state tax laws that may affect you. Nexus applies to both sales tax and income tax. However, the nexus rules for income tax often requires “a more intense level of business dealing in a state.”

Cross-border online sales may account for a significant portion of total e-commerce orders over the next few years. The rules for international warehousing are even more complex because of restrictions as to what can or cannot be legally shipped into various countries. The cost of duties and other taxes can multiply the shipping charges more than ten times in some cases.

International Shipping Considerations

It is possible to take much of the headache out of international shipping by hiring an international company to manage international orders. Many warehousing companies that operate internationally can warehouse your inventory in their warehouse locations overseas and distribute your orders from there, avoiding importation altogether. Shipping can be at domestic, rather than international rates.

In many cases, due to nexus concerns, using warehousing services for interstate distribution may be more problematic than using warehousing services for international shipping. In the case of interstate distribution, the warehousing service may add to costs because of nexus rules. In the case of international distribution, the warehousing service may drastically reduce the cost of distribution.

When making decisions about interstate and international distribution, insightQuote can help you research and find the best warehousing company for your business. Please contact us to learn more.

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