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Crossing State Lines: What Small Businesses Need to Know

June 20, 2019 / by Gianluca Santinelli

Multiple-Locations-on-MapThe phrase "interstate commerce" used to have a fairly straightforward meaning: transporting goods or services from one state to another. But the advent of ecommerce has blurred those traditional state boundaries. If you are based in one state but are doing business, or intend to do business, in other states — even if only via the internet — how do you stay in compliance with all applicable regulations?

The answer depends on the precise nature of your business as well as individual state laws. Here's an example.

Let's Cover the Easy Stuff First
Let's say you live in Delaware and decide to open a seafood restaurant near the Pennsylvania border. You might not even realize this, but you're already off to a good start because Delaware has such a good reputation as a business-friendly state that more than 1 million businesses have made it their legal home.

Your restaurant is a hit. After a couple of years, you realize that many of your customers come from across the state line, so you decide to open a second restaurant in Pennsylvania.

In this case, it's obvious that you are now doing business in another state — or have an economic "nexus," to use the technical term. You're thus required to meet what's called a "foreign qualification" and register your business in Pennsylvania.

In addition, you have to comply with all pertinent regulations and fulfill any tax obligations, such as payroll withholdings and employment taxes. One immediate difference you'll notice is this: Delaware has no sales or meals tax, while Pennsylvania has a quirky sales tax in which fresh fish sold at a grocery store is not taxable but cooked, ready-to-eat fish at a restaurant such as yours is.

Welcome to the often-confounding world of state regulations.

Things Get a Little More Complicated
Alright, so getting your second restaurant up and running in Pennsylvania was a little more taxing (pardon the pun) than you expected, but soon it's doing as well as your original Delaware location. Then a national TV show does a segment on your secret seafood chowder recipe, and suddenly you're getting requests for chowder from all over the country.

At this point, you realize you can capitalize on this exposure by preparing large batches of chowder, packaging it in quart containers and shipping it overnight to individual customers from coast to coast who can order through your website. You have, in other words, expanded your business to include ecommerce.

Uh-oh. Does that mean you now have to register your business in all 50 states? No. But you do have to pay close attention to which states charge tax on out-of-state ecommerce sales. This is a fluid situation that any ecommerce business needs to watch closely.

Things Get Still More Complicated
Pretty soon the logistics of shipping all those individual online orders become overwhelming, and the cost is getting prohibitive. Rather than discontinue online sales, you set up a handful of small regional distributors who get bulk shipments of chowder to deliver to customers within a specified zone.

Do you have to register to do business in the states where you have regional distributors? Yes. Generally, any type of physical presence in a state is considered a sufficient "nexus" to establish you as a legal business entity within that state.

But as is the case with so many of these regulations, the extent of your legal obligations depends on the nature of the business. Are your regional distributors full-time employees, for example, or are they independent contractors who also act as distributors for other companies? The difference is critical, so you'd better be sure.

And That's Just One Example
That growing seafood restaurant provides a representative sample of the basic issues small businesses encounter as they expand beyond the boundaries of their home state: economic nexus, foreign qualification, various types of tax obligations, employees vs. independent contractors.

But again, the details vary greatly from business to business and from state to state. Your best bet is to find a knowledgeable resource that can provide bookkeeping services and operational support and guide you through the process so your business can reach its full potential without being burdened with penalties, fines or even lawsuits.

Topics: Small Business Advice, Bookkeeping Services, Business Advice, Ecommerce, Wilmington, DE

Gianluca Santinelli

Written by Gianluca Santinelli

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