Navigating State Sales Tax for Direct-to-Consumer (DTC) Sales
You likely know the saying about death and taxes, which means you're probably prepared to remit what your winery owes to local, state, and federal agencies. But knowing is only half the battle, and the practical management of state sales tax in DTC environments can be complex.
Understanding state sales tax requirements for direct-to-consumer (DTC) sales is critical for compliance success with your winery or CPG food and beverage business. Because these sectors face complexities when it comes to sales tax, being well-educated and prepared can help you proactively manage your tax and reporting burden.
Understanding State Sales Tax for DTC Sales
The first step of sales tax compliance is understanding the overall big picture related to state sales tax.
What Is State Sales Tax?
Sales tax is levied on goods, services, digital products, lodging, and meals to help generate revenue for local and state governments and programs. State sales tax is any such tax levied by the state. Generally, states use these funds for purposes such as road and infrastructure costs and education.
How these taxes are levied, when you have to pay them, and how they are managed can differ by state, adding an additional level of complexity for DTC businesses that provide goods or services in more than one state.
What Aspects of DTC Sales Are Affected by State Sales Tax?
State sales tax can significantly impact DTC sales for wineries and other businesses in a variety of ways. Whether you can sell goods in a specific location may hinge on getting the proper sales tax certificates, for example, and you'll need to engage in robust record-keeping to ensure you collect, report, and pay accurate sales taxes. Whether you have to charge sales tax obviously impacts your prices, and differing requirements across various products and locations can create confusion and frustration for your customers if you don't handle them correctly.
Common Challenges in State Sales Tax Compliance
Wineries and CPG food and beverage companies can face numerous common DTC sales tax challenges.
Complex tax rates and rules. The most common challenge is understanding what should be taxed and when — this can be incredibly confusing even to well-established winery business owners and managers. For example, a winery may need to charge, collect, and pay sales tax on more than the goods it sells. If you charge for the use of your facility for events like weddings, the amount you charge may be subject to tax in certain cases in California. But this is only the case if you contract for the use of the area and you provide food and beverage within that space for the event.
Direct-to-consumer sales vs. wholesales. If you sell direct to consumers, such as in a tasting room or wine club, your sales tax requirements are very different than if you wholesale to retailers. Keeping track of your various sales channels and how taxes apply to them can be challenging.
Tax exemptions. In many cases, your sales to wholesalers may be exempt from taxes. Various states may also provide other exemptions, but you'll need a good understanding of those rules and a strong paper trail to take advantage of them.
Record-keeping. You must maintain detailed records of shipments, sales, and taxes collected so you can report and pay sales tax in a timely and compliant manner. The data management alone can be an obstacle without the right systems in place.
Interstate sales. If you do business in multiple states or ship wines to consumers, you will have to figure out how tax laws in various states impact your sales.
Changing tax laws. Add to all of the complexities above the fact that tax law is always evolving, and you can see that CPG food and beverage companies face consistent tension in remaining compliant with sales tax. Working with experienced compliance services can help you operate your business within regulation.
State Sales Tax Nexus and Its Implications
Sales tax nexus is a relationship that requires you to collect, report, and pay sales tax when making sales in a specific state. You can trigger a sales tax nexus by having a physical location within the state or via economic activity that meets the state's threshold. For wineries and CPG food and beverage companies, this typically means meeting a threshold for the amount of sales you make to residents within the state.
For example, if you have a winery located in California and you sell wine at a tasting room or any location in the state related to your winery, you automatically trigger a sales tax nexus. You must collect, report, and pay sales tax. However, if your winery is located outside of the state, you don't trigger a sales tax nexus until you reach $500,000 in sales into the state during a calendar year. Texas has the same threshold.
Some states have a threshold that includes sales dollar amounts and transaction numbers. For example, New York's threshold is $500,000 in sales and more than 100 distinct transactions within the calendar year. Other states have much lower sales tax nexus thresholds. For instance, the threshold is only $100,000 in Colorado, Washington, and Arizona.
Best Practices for Managing State Sales Tax
Whether you have a nexus in a single state or many, operate retail-only, combine wholesale and retail sales to support your business, or include DTC sales via shipping, managing state sales tax is critical to protecting your business. Some best practices for doing so include:
Understanding your nexus requirements. Stay up-to-date on nexus requirements in every state you do business in and review your operations periodically so you know if you may have triggered a nexus in a new state.
Registering for applicable permits and certificates. Keep up with permits and certificates as required in states where you have a nexus. If you no longer have a nexus in a state, notify the appropriate office in that state so they don't expect sales tax reports from you.
Charging the correct tax on every sale. Put processes and training in place to ensure you charge the correct sales tax on every purchase.
Keeping excellent records. Keep robust records about your sales to promote accurate sales tax reporting. Digital record-keeping tends to be most helpful.
Being proactive about reporting and paying sales tax. Take time to manage and pay sales tax on time to avoid penalties and fees.
Perhaps the most important step in managing state sales tax well is to choose the appropriate e-commerce platform, as this can be the primary sales tax calculator for DTC brands. Our recommendations include Commerce7, OrderPort, Figure Commerce, and WineDirect for wineries and Shopify for digital CPG brands.
Preparing for State Sales Tax Audits
The best way to prepare for any potential state sales tax audit is to follow proactive practices for collecting, reporting, and paying sales tax. Working with external operations services with experience in winery accounting can help you ensure your processes are appropriate and robust. Some other things you can do to proactively prepare for any future audit include:
Keeping organized records. When you can find what you need quickly and provide backup for your sales tax filings, audits go more smoothly.
Training staff regarding sales tax. Train staff to handle sales tax processes accurately and consistently.
Conduct internal audits. Check up on your processes yourself or hire a third party to do it to ensure you have nothing to worry about if auditors come calling.
Partnering With Compliance Experts
Consider partnering with compliance experts to ensure compliance with state sales tax for DTC sales. The rules and regulations about sales tax for wineries and CPG food and beverage companies can be complex, and experienced CPG accounting experts can help you navigate them for enhanced compliance. Contact BBG to discuss personalized services for winery and CPG accounting today.
