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Does an Ecommerce Store Need to Register in All 50 States?
In the ever-expanding world of ecommerce, businesses have access to a global customer base without the traditional constraints of physical boundaries. However, navigating the complex landscape of legal and tax obligations remains a critical aspect of running an ecommerce store. One common question that arises is whether an ecommerce store needs to register in all 50 states of the United States. In this article, we’ll delve into this question and provide insights into the factors that influence a business’s need for registration across various states.
The Concept of “Nexus”
The determination of whether an ecommerce store needs to register in all 50 states revolves around the concept of “nexus.” Nexus refers to a significant connection or presence that a business has in a particular state, thereby triggering certain legal and tax obligations. Historically, nexus was predominantly associated with physical presence, such as having a brick-and-mortar store or employees in a state. However, with the rise of ecommerce, the notion of nexus has evolved to include virtual presence as well.
Factors Influencing Nexus
- Physical Presence: While the definition of physical presence has expanded to include virtual components, having a physical location, employees, or inventory in a state can still establish nexus. For example, if an ecommerce business operates a warehouse or distribution center in a specific state, it typically triggers nexus.
- Economic Nexus: Many states have introduced economic nexus thresholds. These thresholds are based on the volume of sales, transactions, or revenue generated within the state. Once an ecommerce business crosses these thresholds, it may be required to register and collect state sales taxes.
- Affiliate or Click-Through Nexus: In some states, engaging with affiliates or online partners located within the state can create nexus. This is often referred to as affiliate or click-through nexus and is designed to capture out-of-state businesses that leverage in-state affiliates to promote their products.
- Marketplace Nexus: Selling through online marketplaces like Amazon or eBay can also create nexus for your business, as these platforms often have a physical presence in multiple states.
- Cookie Nexus: In certain states, the use of website cookies to track user behavior may trigger nexus, as it is considered a form of virtual presence.
Implications of Registering in Multiple States
Registering in all 50 states can be an onerous process involving administrative complexities, legal documentation, and varying compliance requirements. However, failing to register when required can lead to penalties, fines, and legal liabilities. Here are a few key considerations:
- Sales Tax Collection: One of the primary reasons for state registration is the obligation to collect and remit state sales taxes on transactions. The recent U.S. Supreme Court case South Dakota v. Wayfair, Inc. (2018) has expanded the states’ authority to require out-of-state sellers to collect sales tax, even without physical presence, based on economic thresholds.
- Legal Jurisdiction: Registering in a state establishes legal jurisdiction, which can have implications for resolving disputes, intellectual property protection, and compliance with local laws.
- Administrative Burden: Managing tax compliance, reporting, and remittance in multiple states can be resource-intensive. Many ecommerce businesses opt to use automated sales tax software to streamline this process.
- Competitive Advantage: Being registered in a state may enhance credibility and trust among local customers who are more likely to purchase from businesses that appear to have a local presence.
In the dynamic landscape of ecommerce, the question of whether an ecommerce store needs to register in all 50 states is nuanced and depends on various factors. The evolving concept of nexus, coupled with the increasing focus on state tax collection, means that businesses must carefully evaluate their activities and relationships in each state. While registering in all 50 states might not be necessary for every ecommerce store, understanding the implications of nexus and compliance requirements is crucial for long-term success and avoiding legal entanglements. Seeking professional advice, such as consulting with tax professionals or legal experts, can provide valuable guidance tailored to a specific business’s circumstances.
Does an E-commerce Store Need to Register in All 50 States?
Let’s take a look at the details here. What if my LLC is registered in New York State with a registered agent in that state? This LLC serves as an online e-commerce Spotify store. Do I need a registered agent in all 50 states? Shopify stores like Fashion Nova, Gymshark, Kith, Allbirds, etc. Do they have nationwide registered agents?
Exclusive Venue Provision and Arbitration Clause
Well, Billy, thanks for this question. There are a couple of considerations here. First, if you are selling to people, you have an opportunity to have a contract in place for those transactions. In that contract, you can specify that if there is a lawsuit, then you need to be exclusively in your jurisdiction. That way, anyone who enters into a contract with you has to file in that jurisdiction. And if they don’t, they have breached the contract. The second thing you can do is have an arbitration provision that requires that the legal action against you be filed in arbitration in your jurisdiction or in your venue.
So these are two separate provisions that can force you to find out about a lawsuit in your state because it forces them to bring that legal action in your state. In most states, but not all, an exclusive venue provision is enforceable, which means if you say in the contract, the only way to sue either party is to start a lawsuit in New York. That is enforceable in most states, but not all.
One state that will enforce them is Minnesota, but when I first graduated from law school, Minnesota would not honor an exclusive venue provision. So it is decided state by state. That is where the arbitration clause comes in. The federal arbitration act trumps all state law. And it says if there is an arbitration provision, it shall be followed. And so, if you really want to make sure that a dispute must be filed in your state, then an arbitration provision is the safest way to do that. That is one way of getting around, practically speaking, having a registration in every state, but technically, you still are required to have a registration in every state, and that requires having a registered agent in those states.
You can pay for a service to have a registered agent in all states, but I understand it costs a lot of money, and a lot of small businesses, especially Etsy businesses or Shopify businesses, may not have the money to pay each year for a registered agent service. And practically speaking, if you get sued so rarely, it may not be worth the expense. You would rather just have the risk of not being registered in those States.
Practical Considerations for Business Owners
What’s the consequence of not being registered in every state? Well, you might not find out about a lawsuit in that state. Now, if you have a provision in the contract that requires them to file a lawsuit in your state or requires them to file an arbitration in your state, then they are supposed to do that. But let’s say, hypothetically, they don’t, and then all of a sudden, a lawsuit from another state you don’t know about comes up. You lose it because you didn’t know about it, and now there is a judgment on file in that state against you. That can then be transferred or docketed to your local state, and they can then garnish and ultimately levy your bank funds. So that is a risk. It is more of a risk with bigger companies. Now, what do you do with that? If that happened, and I have had clients where that has happened, what we need to do is find a licensed attorney in the state where the lawsuit occurred. And then file a motion to undo the judgment that is there, and there are typically two requirements for that. First, you have substantive defenses that were not raised. So, for example, the arbitration provision would be an important one, and then some others. And then second, you need to have acted promptly once you heard about the lawsuit. So it is possible to get those undone.
Practically speaking, here is what most business owners do. They register in the state where they operate. And if they have the guidance of an attorney, they have an exclusive venue provision in all transaction contracts, so, like a purchase agreement. Second, they have an arbitration provision in those contracts. And then third, they accept the risk that there might be lawsuits in other states that they may not know about, but they don’t want to pay the money to register in all those states, and they don’t want to pay the money to maintain a registered agent in all of those states, which means essentially an address at an office or coworking space or law firm where lawsuit papers can physically be handed to somebody.
Once you get to a certain size, it makes sense to do that. Once you have a physical location in a state, it certainly makes sense to do that. But practically speaking, that is what a lot of business owners do, even though technically it is not lawful to operate in a state, including making sales in that state, without actually being registered to do business as a foreign entity in that state.
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