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kozub
Member

state sales tax

what do i do about state sales tax collection

16 REPLIES 16
mwiggenhorn
Member

I believe you do nothing.  State sales tax is usually, if not always, on goods- not services.

I'm not so sure about that. In NJ, when I had my shop open, we had to charge
it on our services too. I heard as of last year a decision was made that all
states had to charge ST on out of state sales. Prior to this ruling, out of
state purchases were exempt unless they had a presence in NJ such as a brick
and mortar store, business, office, etc. That meant individuals were exempt
if they didn't reside in NJ. Guess it's time for a call to our tax
commission. Thanks for the quick reply. I'll let you know what the outcome
is. Mike
prestonhunter
Member

Michael:

Upwork does not levy taxes, nor does it offer tax advice. Pretty much the only thing you'll ever get from Upwork itself (through Customer Support or Forum moderators) is an instruction to consult with local tax authorities and officials.

 

The simple truth of the matter is that Upwork would never be able to provide a comprehensive answer to your question, because the answer to the question will vary depending on local jurisditions and rules. Upwork would need to know what municipality you live in (city/town/village), what county, what state, what country, what type of business you do, what type of services you are providing, and it would need to know this information for the client and the client's business. And it would need to know the precise dates, and amounts of the transactions, and a lot of other stuff.

 

Mary's advice applies to me. Services are generally NOT taxable in my state. (Including business-to-business services, which is how my Upwork freelancing work is categorized.) But I don't know where you live and what your circumstances are. So I can't say with 100% certainty that the same goes for you.

Michael, my best advice is to purchase Intuit Turbo Tax for small businesses.  It will walk you through both state and federal taxes, deductions, etc.  It's also a business expense, so there's that.

I contacted the NJ Sales Tax division and asked about sending electronic
files out of state. This is their reply. MK

To: Michael Kozub



Out-of-State Sales

If taxable items are sold and delivered to the purchaser out of State, New
Jersey Sales Tax should not be collected. If the property is shipped out of
state to a recipient other than the purchaser (e.g., in a gift transaction),
the sale also is not subject to New Jersey Sales Tax. The seller must keep a
record showing both the out-of-State destination and the method of delivery
to that location, such as parcel post receipts, bills of lading, etc.

Sales are taxable, however, if an out-of-state customer picks up the
property in New Jersey. They also are taxable if the property is delivered
to the customer's location in New Jersey, even though the customer may
intend to ship the property out of state at a later date. However,
out-of-state purchasers who are registered with New Jersey and "qualified
out-of-state sellers" may make tax-exempt purchases in New Jersey of
property and services purchased for resale.


You posted information about taxable items.

 

But Upwork freelancers provide business-to-business services.

Which are usually not classified as taxable items.

 

Upwork does not sell "electronic files."

 

Upwork freelancers do not sell "electronic files."

 

Upwork freelancers are hired to perform business services. Sometimes that means we create files as part of our duties. Sometimes not. But we are NOT like Apple, selling songs.

 

But according to what the NJ Sales Tax division told you... Even if you WERE selling taxable items, you don't need to collect sales tax on those items... as long as the client doesn't live in New Jersey.

 

So it would seem that you are quite safe to not worry about sales tax on your Upwork services.

Simply put: Here in NJ if the business doing the purchase from me is the
final consumer, (for example, items such as printed forms used by the
purchasing business, show displays, posters, etc.) then it is taxable. Only
if the purchasing business is reselling to the final consumer, is it tax
exempt. While there are lots of other exempt examples, this is the basic,
simple rule.

Another example would be electronic files. Since there is no physical
object, they are exempt except in the case of a CD, DVD, etc when they
become taxable. Crazy huh?

MK

Michael, if I were you, I would post a job on Upwork for a half-hour consultation with a New Jersey tax attorney or CPA who can figure this out for you.

neffdesign
Member

Hi Michael,

 

I know this is an old thread, but being new to UpWork I'm asking the same question. In Texas, web design is a taxable service (in the oddest way possible...only 80% of it is taxable...). If I do work outside of a platform like this, where a customer comes to me directly, I charge sales tax per our state laws. 

 

Were you able to figure out how state sales tax is handled here? I've also done work on Fiverr (an UpWork like site) and learned they charge the client sales tax, so therefore I don't tax it again on my end. Based on what I've read, UpWork does not, and so I feel like I should be reporting the sale as taxable, but without being able to add that to the client's bill I would be eating it. 

 

Wanted to see if you found an answer or helpful guidance?

Hi Charles,

 

Please check with your local tax advisor for more information on this. You can also check out this help article for income reporting.

 

Thank you.

~ Aleksandar
Upwork

Thank you Aleksandar.

 

A few points:

  1. My question is around US state sales tax, not  income tax, which your article refers to.
  2. My state tax collector does require sales tax on the services I provide on UpWork (Web and Graphic Design). 
    1. It is my understanding that UpWork does not collect that sales tax from the client. Is that correct?
    2. If true, how does a freelancer collect said sales tax when applicable? The law provides for that expense to be passed onto the customer. Freelancers are having to cut into their profits simply because UpWork does not provide a way to facilitate collecting the necessary sales tax as required. 

I refer to Sales Tax in NJ, not income tax. In NJ you need to be registered
as a business to charge, and then send the applicable tax amount collected
to NJ, which you collected from the FINAL consumer. I don't see any way to
accomplish this requirement through Upwork's procedures. But again, I just
did some more research, and see electronic materials are exempt. So unless
you send a tangible object such as a disc, etc. you can claim the tax
exemption. Since you are in Texas, you really need to contact a tax
professional in your state, as I did here in NJ.

In my opinion this is a very confusing issue. What I found out was this: if
I do work for someone in NJ, where I reside, I charge sales tax. If I do
work for someone in another state, no tax. The big issue is Upwork has no
way for me to charge the ST separate from their cut, so I must "absorb" (I
like your words better - eat it) the tax due and pay it to NJ. I did hear if
the transaction is electronic material, it is exempt. Only thing is, I never
found that in writing. This is a very tough deal and needs to be fixed by
Upwork. Good luck!

As a footnote: I have been with Upwork for a while and have secured only one
job. This is causing my confidence in this to wane a bit since I signed on
with them. I find getting proper remuneration for the required work is
pitiful. I do find it somewhat difficult to believe the budgets are for real
or they are trying to get a diamond for the price of coal. MK

I know for a fact in Texas, Web and Graphic Design (my services) are a taxable service. I pay sales tax on these services outside of UpWork and have had several conversations with our state comptroller’s office. Every state is different though.

 

Now, whether you collect tax on items sold over the internet to someone residing outside your state is a decade-old debate. When I started my business in 2001, the tax laws said you collect tax according to where the sale took place (that was obviously not written with the Internet in mind...was that my living-room or theirs...). The  Supreme Court in 2018 made it even more complicated in South Dakota v. Wayfair, holding that a state can collect sales tax from online retailers that reside out of their state if they sell to a resident of their state. This ultimately would require us all to know the sales tax laws of each state our customers reside in and remit those taxes to those states (QuickBooks has a remarkable feature that does this sleuthing for you, but being the simple freelancer I am...I play dumb and focus on my state). 

 

I appreciate your response and perspective. 

 

(I too have low expectations for what I might get out of this platform. This is the third freelance platform I've joined, and have yet to find any of them to really be worth their hype.)  

I have also wondered about this since I too live in Texas.  However, the customer is not paying us directly correct?  If they are paying upwork wouldn't upwork be responsible for sales tax even though I live in Texas and the custoemr lives in Texas?  I don't take money directly so from an accounting perspective Upwork is the vendor.  Maybe I am completely off here

Hi Michael,

 

I came across this thread and I noticed that the question about sales tax had never been answered so I thought I'd offer my two cents. Please note before reading I am *not* an accountant and the following info should not be considered legal tax advice and you should consult a tax professional before making any business or finanicial decisions.

 

I have done extensive research on this and may be able to shed some light on the topic. The reason the issue of state sales tax is so confusing is because the legal landscape was determined by court ruling, not federal law, and from an era before the internet existed. In 1992 the Supreme Court ruled in Quill v North Dakota that no state can levy an out of state sales tax unless a company has a "physical nexus" in a state (think storefront or warehouse); thus 99.99% of Upwork freelancers were exempt from paying any out of state sales tax.

 

However in 2018, in South Dakota v Wayfair the Supreme Court overruled itself and now the physical nexus rule no longer applies; states can levy sales tax on *any* transaction they see fit. Fortunately the US is very friendly to small business and after South Dakota v Wayfair most passed "economic nexus" sales tax laws with very high minimum thresholds, ranging from $100,000 to $1,000,000 or several hundred transactions depending on the state. For example in Alaska you would need to bill $100,000 gross revenue from that state or bill 200 separate transactions for the sales tax to kick in. In Alabama the threshold is $250,000 with no transanction trigger. In California, the threshold is $500,000. A great summary of economic nexus laws by state is available here: https://www.avalara.com/us/en/learn/guides/state-by-state-guide-economic-nexus-laws.html

 

The upshot is almost no one on Upwork should ever have to pay out of state sales tax. However, these nexus laws do not apply to *in state* sales tax so I would suggest consulting an accountant in your area if you have Upwork clients that are located in the same state as you. Unfortunately Upwork doesn't provide a mechanism to collect sales tax so I imagine calculating this could be quite an ordeal without help. Whether freelance work is exempt from sales tax will depend on the state: https://www.avalara.com/us/en/blog/2015/04/freelancers-independent-contractors-and-taxes.html

 

Lastly, regarding your specific point about not taking money directly from clients this is not true. Upwork is a platform that connects clients and freelancers. Any billing is considered direct between you and the client; you can see this in your transaction history, Upwork is subtracting "fees" post invoice. The upside to this is that you can report the pre-Upwork fee billing as gross income which can be beneficial if applying for a loan or credit card (again a reminder I am not an accountant and you should speak to an accountant in your area before making any decisions). 

 

Hope this helps!

 

 

 

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