If you’re selling products online, that means you can reach customers from all across the country. That’s terrific news – except when it comes to sales tax. Calculating online sales tax isn’t easy, but it’s a necessary part of conducting online business. We’ve developed this guide to help you break down online sales taxes and ensure you’re always playing by the rules.
What is Sales Tax?
Sales tax is a fee levied on the sale of certain goods or services. Currently, taxes on sales is charged by 45 states as well as many local governments. Generally, these taxes are collected and remitted by the seller, so that means it’s up to eCommerce businesses to implement a system for managing online sales taxes.
Do E-Commerce Businesses Need to Charge Sales Tax?
The short answer: yes.
All businesses are required to collect this tax in states where they have economic nexus (Tax nexus refers to the level of connection between a business and a state that triggers tax obligations). Current regulations dictate that online retailers must collect and remit sales tax, typically despite the status of their physical location.
Understanding Nexus
If that all sounds a little complicated, that’s because it is. In the past, retailers with a physical location in a state (like a warehouse) had these taxes on sales. Under that definition, online sellers could simply collect sales taxes in the states where they had physical facilities and were off the hook for the rest.
In 2018, a supreme court decision allowed states to define tax nexus more broadly so that eCommerce businesses are included even if they have no physical locations within their borders. After that, many states enacted remote seller laws requiring online retailers to collect and remit sales tax. Additionally, some states have passed laws requiring marketplace facilitators such as Amazon and Etsy to collect taxes at the point of sale. So – eCommerce taxes are complicated, but don’t panic. We’ll break down more information here, and if you feel like managing this process is out of your depth, an experienced partner can offer valuable support.
Steps to Sales Tax Compliance
You can ensure your bases are covered by following these steps.
Determine where you have sales tax nexus
Online sellers need to do some research on US tax laws and how they apply to their business. The states without sales tax are Alaska, Delaware, Montana, New Hampshire, and Oregon. Among states with sales tax, all but two states (Florida and Missouri) currently require remote sellers to collect and remit sales tax. Note that Alaska is a more nuanced case that requires even more research. Look into the following:
- Check thresholds (most states have substantial thresholds when it comes to tax nexus).
- Understand sales footprints such as volume by state.
- Research individual state requirements so you understand the differences between how states handle remote sellers.
- Remember local tax as well as state taxes. Some places have both and you are responsible for all of these taxes.
Check affiliate policies
Marketplace facilitators like Amazon or Etsy may handle the bulk of sales tax collection and remittance for you. That being said, any time you work with a third party, you must know the laws in the states where you sell, ask questions about anything you’re not clear on, and then audit your transactions occasionally to verify taxes are being handled correctly.
Obtain seller’s permits
Once you know exactly where you need to collect sales tax, you’ll have to acquire the necessary permits. Check with the revenue department to see what permits you need, such as a seller’s permit or sales tax permit. You can probably handle this online. Start by visiting state websites and look for tools that can streamline the registration for multiple states (such as this one by SSTGB).
Collect and remit sales tax
The fact is that every state will have its own rules and processes for remitting taxes. They are commonly submitted monthly, although some states may allow quarterly filing. Software is a great tool for this. Most eCommerce CMS systems or small business tax software are built to simplify the tax process including collection, reporting, and remittance. You should also train employees so that they’re comfortable handling taxes for remote sales.
Monitor Compliance
Remote seller laws are complicated and they are still developing and changing. That’s why it’s important to conduct periodic audits to be sure of compliance. Stay up to date on your state’s revenue department communications, monitor sales regularly, and consult with advisors if you ever have questions. A small business tax advisor is a good place to start.
Other Important Ecommerce Sales Tax Facts for Online Sellers
We just covered a lot – but there’s more to learn about sales tax. It’s a complex topic and you want to be sure you’re as educated as possible to protect your eCommerce business. Here are a few other things to know about online sales tax.
Resale certificates are different
If you conduct retail arbitrage (buying items at retail with the intent to resell them yourself), then you are not required to pay sales tax on those items if you present your resale certificate to a participating retailer. That being said, retailers may choose not to accept that certificate. In those cases, you’ll be charged sales tax but you may be able to reclaim the sales tax you paid. These are all circumstances to be aware of.
Always double check
No matter how robust your software systems or how much trust you have in your tax advisors, you need to make time to conduct check-ups on the process. Do you know how opening a location in another state, or simply making over a certain amount of sales or making a certain number of sales transactions in a state will affect things? Periodic reviews will ensure you have the latest information and catch errors before they become a problem.
Sales Tax Mistakes Can be Costly
Because there are so many rules and variations, it can be surprisingly easy to make a mistake when dealing with online sales tax. It’s incumbent on eCommerce businesses to properly research and manage the collection and remittance of taxes – otherwise they may face fines or fees such as late fees and interest charges. Many small businesses use software tools and rely on the advice of experts like tax professionals or fulfillment partners.
While not a tax advisor, a 3PL partner can help you to better understand all of the complexities of selling online (including state-by-state differences), and apply best practices they’ve learned from working with eCommerce businesses of all sizes. Contact us for a free consultation where we’ll discuss your unique eCommerce fulfillment needs.