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US Business Tax And Legal Liability FAQ

sales and use tax liability

Key Tax Considerations for New Business Owners

DISCLAIMER. This is not legal or tax advice. Speak to counsel.’



Table of Contents

Intro. 2

Tax Liability 2

Legal Liability 2

Income Tax and your LLC. 3

Step 1: Are you a US person or a foreign person?. 3

Step #2 Determine your entity classification. 3

Sales Tax Liability for Remote Sellers (FBA/Drop Shippers) 4

Table of Sales Tax Models. 4

Are you at risk?  The following questions will help you determine when and where sales tax is owed, and whether or not a reseller certificate should be submitted. 5

The New York Question. 5

Multi-state transactions  sales and use taxes 7

Who has a duty to collect and pay sales and use taxes?. 7

Sales and Use Tax Registration. 7





As a business registered in, operating in, or selling to Americans, you’ve got two pressing considerations: Tax Liability and Legal Liability. Outside of having no sales, these risks are the #1 killers of small business.  We’ll walk you through key considerations that you should discuss with legal counsel.

Tax Liability


You have the power to decide how you want to be taxed and there are also things that you can do to help reduce, or even eliminate, the tax that you pay.


The Internal Revenue Service (IRS) is responsible for collecting federal income tax revenues and enforcing federal income tax laws.[1] In addition to the federal income tax, each of the 50 states and the District of Columbia impose some or all of the following: individual income tax, corporate income tax, sales tax, real estate transfer tax, gross margin tax, and franchise tax.

You likely established a US business in one of a few states.


Most states have a corporate income tax that works in conjunction with federal income tax law, and those taxes are generally lower than the federal income tax. However, sales and other taxes imposed by states and localities can vary greatly and may play an important role in determining how an investment should be structured.


Legal Liability

As a business owner, one of your biggest dangers is a lawsuit.  Even if you could win, your priority should be avoiding this at all costs.  The next best thing to avoiding lawsuits, is to make sure that if you are sued, you don’t lose absolutely everything that you own.


Income Tax and your LLC

If your US pass-through entity generates revenue from sales inside and outside the US.   You may have income tax and sales tax obligations. Here’s a two-step process to assess your exposure at the federal tax level.


Step 1: Are you a US person or a foreign person?

Status Definition
 United States person



·      A citizen or resident of the United States

·      A domestic partnership

·      A domestic corporation

·      Any estate other than a foreign estate

·      Any trust if:

·      A court within the United States is able to exercise primary supervision over the administration of the trust, and

·      One or more United States persons have the authority to control all substantial decisions of the trust

·      Any other person that is not a foreign person.


A foreign/Non-US person


·      Nonresident alien individual

·      Foreign corporation

·      Foreign partnership

·      Foreign trust

·      A foreign estate

·      Any other person that is not a U.S. person

·      Generally, the U.S. branch of a foreign corporation or partnership is treated as a foreign person



Step #2 Determine your entity classification.


Generally, a US business entity will have one of the following default classifications:

  • A “C” corporation. All US corporations are “C” corporations by default.
  • A partnership. These are non-corporate business entities with more than one owner.
  • A disregarded entity. These are non-corporate business entities with one owner, such as single-member limited liability companies (LLCs).

Generally, non-US persons and non-residents are taxable only on their US source income. If you have a pass-through entity, such as an LLC, you’ll have to arrive at adjusted gross income by starting with gross income, subtract certain deductions, such as trade or business expenses,  and unreimbursed business expenses, for taxable income.



Sales Tax Liability for Remote Sellers (FBA/Drop Shippers)


Many states are attempting to tax the popular Fulfillment by Amazon (FBA) and drop shipping business model. Used by remote/online sellers (i.e. retailers that sell over the internet) by enacting sales tax laws that have become known as the “Amazon Laws” or “Click-Through Nexus” provisions.


Table of Sales Tax Models.

Type of Law Definition
Click-Through Nexus: Require a remote/online seller to collect sales tax from customers located in a state if the seller has an association with any of its in-state marketing affiliates with links or ads through which customers buy from the seller’s online store.


Affiliated/Related Party Nexus Creates a nexus in a state if the remote/online seller uses a subsidiary or some other commonly owned members of its group to perform in-state services in connection with the retailer’s sale of tangible personal property; owns or leases a storage or distribution center or warehouse in the state; uses common trademarks or any activities that enhance the remote/online sellers’ sales position in the state.

Remote/online seller collects sales tax

Reporting/Notification Requirements Requires the remote/online seller to report their sales transactions to the state’s tax authority and notify their in-state customers about their responsibility to pay use tax.



For smaller businesses, the myriad of differing regulations carries a very high risk of sales tax errors; sales tax errors lead to more aggressive audits and expensive fines and penalties.  Moreover, this scenario is expected to get worse before it gets better if a federal proposal to allow states to require out-of-state sellers to collect sales tax becomes law. Under the Marketplace Fairness Act, states that don’t currently require out of state manufacturers, distributors, wholesalers, or drop shippers to collect sales tax would likely begin to.

Are you at risk?  The following questions will help you determine when and where sales tax is owed, and whether or not a reseller certificate should be submitted.

1) In a drop shipping scenario, when is there a sales or use tax obligation?

2) Do states consider drop-shipping a nexus-creating activity?

3) Do you have a valid resale certificate?


Generally, businesses must have a nexus to the state to be liable for sales and use tax.  However, the definition of nexus isn’t clear cut.  Let’s take a look at New York for example.

The New York Question


As an attorney that practiced litigation in New York, I was in my element when the question of liability turned on the “substantial nexus” issue.     An out-of-state seller must have substantial nexus with New York before it can be required to collect sales tax.  Although New York’s standard requires that some amount of physical presence is required to establish substantial nexus, some New York courts have interpreted that standard so liberally that virtually any form of physical presence within New York, combined with sales within New York, can create nexus for an out-of-state seller.


Activities that could give rise to substantial nexus with New York include:


Maintaining a place of business within New York, either directly or through a subsidiary, including:

  • a distribution center;
  • a credit and collection office; or
  • an administrative office; (20 NYCRR § 526.10(a)(2).)
  • Soliciting business through employees, independent contractors, agents, or other representatives.


Distributing catalogues or other advertising material in New York if combined with additional connections, including:

  • the presence of employees, sales representatives, independent contractors, or agents in New York;
  • the maintenance of a post office box in New York to receive orders relating to the catalogue or advertising;
  • the maintenance of an office in New York even if not connected with the sales being solicited; or
  • regularly and systematically soliciting business within New York through these materials.
  • Participating in trade shows, even sporadically.
  • Maintaining inventory or other tangible personal property in New York.



Out-of-state sellers[2] with no physical presence in New York are considered to have substantial nexus with New York if the seller either:

  • Maintains links on websites maintained by New York residents and pays commissions on sales made by those links unless the seller proves the in-state company engaged in no active solicitation other than hosting the out-of-state company’s link on its own website (Y. Tax Law § 1101(b)(8)(vi)).
  • Has an affiliate that conducts activities in New York and:
  • the out-of-state seller uses the same trademark, service mark, or trade name in New York as that used in New York by the in-state affiliate; or
  • the in-state affiliate engages in sufficient activities in New York that benefit the out-of-state affiliate in developing and maintaining a market in New York.


To determine whether your activities might have a nexus, contact counsel at ask@scotchpalm.com


Multi-state transactions  sales and use taxes

Under New York’s law, out-of-state sellers with no physical presence in New York (for example, internet-based retailers) are presumed to have sales tax nexus with the state if they both:

  • Maintain links on websites maintained by New York residents.
  • Pay commissions on sales made through those links.
  • New York has also adopted criteria by which an out-of-state seller with no physical presence itself can become subject to sales tax collection obligations because of the in-state activities of a separate but affiliated company.

Who has a duty to collect and pay sales and use taxes?

Both the sales and use taxes are ultimately imposed on the purchaser. However, a vendor who makes sales of tangible personal property or taxable services within New York and has the requisite nexus must collect the sales tax from the purchaser at the time of the sale unless the purchaser presents documentation of a valid exemption.

  • If salestax has not been paid on a taxable transaction, New York can assess the vendor or the purchaser for unpaid sales tax,


Sales and Use Tax Registration

A vendor must obtain a certificate of registration from New York before commencing sales if it both:

  • Sells tangible items (clothing, electronics, etc.) in New York
  • Has sufficient nexus with the state.

A vendor registers  with the New York Department of Taxation and Finance  within 20 days of commencing business or making  sales.  Thanks for Avalara for some of the content.


DISCLAIMER. This is not legal or tax advice. Speak to counsel.’


Learn more @ Scotch & Palm Private Client Law Group

[1] The laws governing the imposition of the federal income tax are generally found in the Internal Revenue Code of 1986, as amended (1986 IRC), which is located in Title 26 of the US Code. In addition to the 1986 IRC, sources of law include the regulations promulgated by the Department of Treasury interpreting the 1986 IRC, rulings interpreting the 1986 IRC and case law.



[2] New York provides a special exemption for out-of-state sellers whose presence in New York is limited to the use of an in-state fulfillment service to handle inventory and shipping, even if inventory is stored at that location. These sellers are not required to register as vendors in New York unless the fulfillment service is affiliated by ownership with the out-of-state company (N.Y. Tax Law § 1101(b)(8)(v)


What a DBA is not!

DBA Much?

A recent client asked us about the pros and cons of registering fictitious name aka DBA in New York.
As a startup attorney, I know other small businesses must have the same question but none have time for leisure reading. Here’s a quick snippet to remember:
  1. A DBA is not a legal entity, and has a very limited function. A DBA won’t protect your personal assets in a lawsuit; that’s a job best suited to LLCs, S-Corp, etc.
  2. A DBA could be sued if your fictitious name is confused with another company’s, possibly violating that party’s Intellectual Property (IP) rights!
  3. A DBA is not a business–it’s mission, vision, values, and people.
You can deduct the cost of legal fees and registration costs when tax time comes around.




Depreciation for dummies…really smart small business, freelancer dummies

Depreciation, pimp my assets!

In sum, the Man (Amerika) has this concept called depreciation, which allows businesses to depreciate—or gradually deduct the cost of —assets such as equipment, fixtures, furniture, etc., that will last more than one year. Learn more here, via Turbotax. 

Depreciation’s always been a good deal for capital intensive businesses large and small. The old rules provided a 50% bonus depreciation for qualified assets acquired, but these assets had to be purchased new, not used.  Still, a pretty good deal, especially when talking real estate and vehicles.

Depreciation: A good deal for some.

For example, you’d get to lower your taxable income by thousands every year by using your building or car for business.  Wage earners/W2s got a few breadcrumbs,, but they were always limited; however, since the Tax Cuts and Jobs Act of 2017, businesses got a huge windfall, and have even MORE reason to “acquire” assets and wage earners get almost NO breaks for doing essentially the same thing. No arguing the morality, just spitting facts.  So, here’s what you need to know:

Bonus Depreciation, A better deal for fewer

Under the new rules, YOU, you really smart small business dummy, can take 100% bonus “expensing” of qualified assets that are new or used., acquired and placed in service after September 27, 2017. The percentage of bonus depreciation phases down in 2023 to 80%, 2024 to 60%, 2025 to 40%, and 2026 to 20%. After 2026 there is no further bonus depreciation. This bonus “expensing” should not be confused with expensing under Code Section 179 which has entirely separate rules,

A few more resources




***Disclaimer** This response was prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. Attorney advertising. If you have any more questions, reach out to the team at ScotchPalm.com—fearlessly connecting the dots for entrepreneurs.


Tax Reform Snippets for small business owners and self-employed

1099s, Unite!

Is the new tax law good for freelancers and independent contractors? Well, it depends. Over a few posts, I”ll highlight a few amazing wins for 1099s.

Here’s one example where it’s pretty amazing to get paid without a W-2.

20% Qualified Business Income Expense

Isaac is a freelance journalist who earned $26K from his articles being published.  Since he’s single, no kids, he’ll save about $625 bucks on his 2018 taxes because he may deduct up to 20% of qualified business income.  This applies to income from a partnership, s-corp or sole proprietorship for a tax year.

There are a few limitations, so check with a hotshot tax advisor who specializes in small businesses. And if you’re a DIYer, here’s a useful resource, courtesy of TurboTax.




***Disclaimer** This response was prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. Attorney advertising. If you have any more questions, reach out to the team at ScotchPalm.com—fearlessly connecting the dots for entrepreneurs.


For employees, this one tax change could lower their paycheck

If You’re a W2 Employee, This One Tax Change Could Mean Real Pain 


New tax bill wiped out Unreimbursed Expense Deduction

One benefit employees have lost under the new tax law is an employee’s ability to deduct unreimbursed expenses related to their job.  So it might not kill you, but will lower your take-home pay. The deduction for unreimbursed employee expenses was among the qualified 2-percent miscellaneous itemized deductions that were eliminated by the Tax Cuts and Jobs Act (TCJA) passed in Winter 2017.


This affects employee’s ability to do those little (or big) things

This is a huge a blow for employees who had relied on it to deduct unreimbursed expenses like work-related travel, meals, entertainment, gifts, lodging, tools, supplies, professional dues, licensing fees, work clothes and work-related education.

Employee Tips

  • Seek the Win-win #:  If you are an employee who has used this tax deduction, here are some tips to minimize your loss:
    • Determine the impact. Review your past tax records to help estimate how much you expect to pay in unreimbursed work expenses and what the tax deduction was worth to you.
    • Talk to your employer. Your boss might not even know that the loss of this deduction is a hardship, so explain how you will be affected.
    • Push the win-win. Ask your employer to consider reimbursing you for your work-related expenses directly. Your employer can probably deduct those expenses from their business return without increasing your taxable income. This will save them tax dollars when compared with the cost of raising your pay in order to indirectly compensate you for your unreimbursed expenses.

Employer Tips

Review your vision, mission, and values, and talk to your employees about their unreimbursed expenses in light of the tax law changes. If you aligns with your values to reimburse them for qualified business expenses, check with your bookkeeper/accountant.  Make sure your reporting adheres to IRS accountable plan rules so that your reimbursements are deductible as a business expense and do not add to your employees’ incomes.


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