If virtual events have one undeniable advantage, it’s their potential for a much wider reach than traditional in-person events. The catch is that this expanded scope can mean much more complicated tax implications under US law.
The trend toward virtual and hybrid events is only gaining momentum, and learning how to run them effectively will soon be considered a core qualification for event planners. A June CEIR survey of B2B exhibition organizers found that 81 percent of respondents had plans to offer one or more virtual products in 2020.
Some may not be aware that pivoting to virtual could mean falling under new taxation rules. Adapting your taxation policy might not be top of mind at a time when your resources are already being pushed to their limits, but ignoring them now could mean legal difficulties down the road.
What exactly is so complicated about applying sales tax to online event tickets?
Sales tax rules are determined by the state (and sometimes even by the county), so they vary from region to region. For in-person events, the sales tax obligations are pretty straightforward: you usually charge taxes based on the rates that apply in the state where the event is held. It goes without saying that tickets for virtual events can easily be sold to out-of-state customers, so which tax rules prevail in this scenario?
Unfortunately there is no one-size-fits-all answer. There are, however, some overarching principles that can help you figure out where you stand. To get you started, this article explains some of the key terminology and basic framework behind the sales tax laws for online retailers in the US.
How the Term ‘Tax Nexus’ Applies to Online Ticket Sales
One of the most important terms to understand is “tax nexus.” It generally refers to some kind of connection or relationship that allows a state (or other government body) to apply taxes to a business. Traditionally, the principle of a tax nexus was mostly determined by physical presence within a tax jurisdiction — in other words, a state could tax businesses that operated through stores or other brick-and-mortar structures located inside its territory. With the explosion of inter-state transactions through online sales in recent years, it’s easy to see why some jurisdictions might want to rethink this policy.
As explained in the Balance Small Business blog post, What Is Tax Nexus?, there are three main types of tax nexus that can apply to online sales:
- keyboard_arrow_right Click-through nexus: This nexus applies when an in-state business functions to redirect its online visitors to your site; advertising on the website of an in-state business, for example, could trigger this type of nexus.
- keyboard_arrow_right Affiliate nexus / marketplace facilitator laws: As these names suggest, this nexus relates to an ‘affiliate’ relationship whereby an in-state company helps to facilitate your business transactions. An online marketplace or referral arrangement could qualify under this category, but the burden of collecting taxes generally falls to the affiliated in-state company. For example, if you partnered with an in-state company to advertise and sell your virtual event tickets to people within that state, the responsibility for applying the appropriate tax rates would generally fall on the partner company’s shoulders. The Amazon Affiliates program performs this role for its partner retailers.
- keyboard_arrow_right Economic nexus: This is the broadest and the most widely-adopted of the nexus categories that apply to online sales. It is based on a precedent set by a 2018 Supreme Court decision in the South Dakota v. Wayfair case, and it essentially rests on the idea that business transactions themselves can be enough to establish a ‘connection’ or ‘relationship’ within a state if they represent a sufficiently large amount of money.
In its post How to Comply With US Sales Tax For Online Courses, the e-course platform Thinkific explains that a “cookie nexus” also applies in a handful of states, but it’s usually contingent on such a high threshold for traffic that the newer economic nexus standard would apply anyway.
As the Tax Foundation suggests, the “click-through” and “cookie” nexus standards are in some ways now obsolete:
“Prior to Wayfair’s [court case], states found creative, if sometimes dubious, ways to expand the definition of physical presence, like click-through or cookie nexus [...]; now that states have a more straightforward way to impose sales tax obligations, they should repeal these subjectively-enforced vestiges of the prior regime.”
According to the Tax Foundation, 43 of 45 states have adopted some form of economic nexus taxation policy.
If You’re Not a Big-League Seller, the Rules Don’t Apply
The good news is that most states have established a minimum threshold of economic traffic for the tax rules to kick in. In other words, if the income that you draw from customers in a given state is under the threshold, the tax rules do not apply to you.
The SaaS company Swoogo has produced a state-by-state guide on these thresholds, titled the US Sales Tax Guide For Events. In most states, the minimum threshold ranges from $100,000 to $250,000, but there are some outliers like Oklahoma, Pennsylvania, and Washington where the minimum threshold is only $10,000. On the other end of the spectrum are Tennessee and Massachusetts, with thresholds of $500,000. Some states also have a minimum number of transactions that trigger the tax to take effect, and these usually range from 100 to 200 transactions.
As one final point to keep in mind, the taxes that apply are generally based on the location of the end client (what is often referred to as the “destination” rather than the “origin” in taxation terminology). For example, if you are hosting an online event in Nevada and someone from Minnesota purchases a ticket to participate remotely, you would charge the client based on Minnesota’s sales tax rates.
Does Falling Under a Tax Nexus Automatically Mean That Event Planners Need to Charge Sales Tax?
Let’s say you sell more than $100,000 worth of tickets in a state where that’s the threshold for economic nexus. Does that mean you automatically have to start applying the state’s sales tax rates to your ticket prices? Not necessarily.
Different states have different rules about what goods and services are considered taxable. In her article B2B Virtual Events are Here to Stay – Know the Tax Implications, tax expert Gail Cole explains that online events could potentially be classified under any one of the following categories, each of which is subject to different tax rules:
- keyboard_arrow_right Training and seminar
- keyboard_arrow_right Online training
- keyboard_arrow_right Videos (streaming or electronic download)
- keyboard_arrow_right Video programming streamed over the internet
- keyboard_arrow_right Software
The last of these — software — is perhaps the most surprising. Cole cites a 2013 Massachusetts Department of Revenue ruling in which a company’s “Virtual Event Center” or “VEC” was deemed taxable as software. With that said, it’s important to note that the “VEC” in question did function as a kind of software service. It was an online platform for virtual events, with event companies paying a fee to use the SaaS company’s program. It was this online service, not the events themselves, that were classified as software.
By extension, this type of sales tax applies to the fees associated with using SaaS event platforms. If you are developing your own in-house online event platform, there might be some grey area in terms of whether attendees or exhibitors are paying to use your software.
Are there any other points to keep in mind when trying to figure out what other categories might apply?
Thinkific’s How to Comply With US Sales Tax For Online Courses blog post has some helpful tips. They base their advice on the rules that apply under the Streamlined Sales and Use Tax Agreement (SSUTA). While this agreement has yet to be adopted everywhere across the US, it counts 23 states as full members. Under the SSUTA, online training is not subject to a sales tax if any one of the following conditions apply:
- keyboard_arrow_right The seminar is presented live in real time.
- keyboard_arrow_right The participants can interact with each other or with the presenter in real time.
- keyboard_arrow_right The participants are evaluated by an actual human being and not an automated software program.
Automated interfaces and pre-recorded content are the elements that might push an event’s “training” activities into taxable territory. Downloadable content is another feature that could be subject to a sales tax. In 6 Event Planning Questions Answered About The New US Sales Tax Rulings, the Swoogo blog recommends itemizing different features of your event and attaching specific charges to each. That way, if any one feature is subject to taxation, only that part of the bill will have tax added to it. Otherwise, the entire ticket price might be hit with the same taxation rate.
How Do I Know if Remote Seller Sales Tax Applies to Me?
If the following conditions apply to your event, you will likely be exempt from the remote seller sales tax:
- keyboard_arrow_right Your annual revenue from individual states is under $100,000 and represents under 100 transactions.
- keyboard_arrow_right You are paying a third-party company to provide the event software.
- keyboard_arrow_right Your event is streamed live and incorporates real-time interactions.
- keyboard_arrow_right If the event involves any kind of assessment of participants, the evaluation is conducted by an actual human being.
- keyboard_arrow_right There is no downloadable content.
And remember, it’s a good idea to break down the event ticket price into individual charges for each component wherever possible. That way, any feature that falls under a taxable category will be taxed individually.
Doing business online can be a bit of a headache when it comes to figuring out what taxes apply to inter-state transactions. The first step is to understand the basic framework that applies in most states.
Once you have a grasp of these rules, you should be closer to knowing whether you need to consult with a tax expert. Another option would be to work with an online event platform that already has some form of taxation-compliance mechanism integrated into its service.
When in doubt, be sure to consult a certified accountant. No one can become an expert in online sales tax rules overnight, least of all an event planner already working overtime to anticipate the industry’s new normal.