Collecting sales tax; however, is most likely not one of those. If you’re new to understanding how to remit Internet sales tax, and feeling overwhelmed, keep reading. Below are some simplified tips and steps to walk you through understanding, collecting, and paying your online sales tax.
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Looking for something specific? This article will cover:
- Where do you have to charge sales tax for online sales?
- State nexus thresholds
- Beginning to collect sales tax
- Location-based sales tax
- Sales tax considerations
What is internet sales tax?
Internet sales tax at its most basic is the tax attached to a sale of a product or service from an Internet retailer or e-commerce business owner. In order for the business to be sales tax compliant, they must charge and collect the sales tax from the buyer and then remit to the state’s revenue department.
As of this writing, there’s still no such thing as federal sales tax. Like income tax rates, each state has its own rules and rates; thus leaving you with 46 potential different scenarios (45 states + Washington D.C., because some states have no sale tax). Sales tax rules change depending on what state you sell to, where you’re shipping an item to, and what types of products you sell.
To help you understand, let’s start with some basics.
There are only five states who don’t have sales tax. They are Alaska, Delaware, Montana, New Hampshire, and Oregon.
To help you remember these five, here's a fun video:
When do I need to collect sales tax?
Knowing which state to collect in is fairly easy, as far as if they have sales tax laws or not. But knowing IF you should collect is defined by a concept called “sales tax nexus” -- and that’s a whole other ballgame. It’s not as easy as collecting where your home office is located. Nexus laws apply and can often be tricky depending if you’re a “remote” seller or not.
What creates sales tax nexus?
You may have heard the word nexus in its literal meaning, to bind, join, or tie. But in sales tax, nexus is just a fancy way for the state to decide if you must pay them sales tax or not.
Physical nexus typically means you have a physical presence in a state; be it your business address, home office, brick and mortar location, where your employees are located, or where your products are stored, such as a warehouse, among other things. If you qualify as having physical nexus, you are required to collect sales tax in that state.
Physical nexus was historically the biggest factor for determining the need for sales tax compliance. Then, in June 2018, the Supreme Court overturned a decades-old decision in a groundbreaking case known as Wayfair v. South Dakota. In this case, the state was granted the power to enforce their own sales tax laws on a business regardless of if they had physical nexus or not. From this, the concept of economic nexus was born.
The most important thing to know about economic nexus is that there is no one-size-fits-all threshold to trigger it. After the Wayfair decision, South Dakota set their state threshold for retailers to pay sales tax once they hit $100,000 in sales and 200 transactions into the state over a 12-month period. While some states have mimicked these same figures, others have their own limits.
To give some examples, Tennessee announced their threshold was $500,000 in sales over the previous 12 months, no matter how many transactions were made. Massachusetts is the same figure of $500,000 but also requires you to have 100 transactions into the state in order to trigger economic nexus. And Connecticut’s law is $250,000 and 200 transactions over the last 12 months. This variance can have significant implications for high-volume sellers with customers across the country.
Further, some states have a notice and report, and some have future plans to enforce economic nexus laws, but they’re not yet in effect. To learn where each state is with their economic nexus thresholds, here’s an economic nexus state map guide. And, to know when you qualify for nexus or not, here’s a handy sales and transaction checker.
Now that you know if and where you have nexus, the next step is to register for a sales tax permit. If you collect sales tax, you’ll need a permit because it’s against the law to collect sales tax without one. Like with nexus, each state differs somewhat, but the steps are relatively the same when registering to collect sales tax:
- Gather all of your vital business information, like your employee identification number (EIN) and any information that identifies your business.
- Visit the Department of Revenue website for your state. Each state has one.
- Click on or search for the “Sales and Use Tax” section within the DoR website.
- Click the link to register your business.
While it may take a few weeks to receive your application, don’t worry. The state may ask for more information, such as your gross sales or the types of products you sell after you’ve submitted your application. Once they’ve reviewed it, you’ll be granted a tax ID number to use when collecting sales tax. You’ll also receive instructions on how to file sales tax returns.
What if my marketplace collects?
It may seem like you’re off the hook if you sell goods on an online marketplace like Amazon or Etsy if you’re in a state where they collect sales tax on your behalf. But, there’s still work to do. Marketplace facilitator laws are relatively new, and even though some states do impose these laws, most sellers must still keep their permit valid. A marketplace facilitator will only handle the sales tax on transactions sold through its platform.
So, if you sell products on a personal website or storefront outside of that marketplace, you’ll still need to collect taxes through the sales on your own website even if Etsy or Amazon collects for you.
Two other important variables around collecting sales tax are understanding if your business is located in an origin-based state or a destination-based state.
Origin-based states require sales tax collection based on the sellers’ business location. There are 12 origin-based states, so if you live in Arizona, California, Illinois, Mississippi, Missouri, New Mexico, Ohio, Pennsylvania, Tennessee, Texas, Utah, or Virginia, you should be charging the tax rate for where your business is located. Please note, that rate could include a combination of state, county, city, and district tax rates.
If you’re in a destination-based state, you’ll determine your sales tax rate based on where your buyer is located or the destination of the sale. This can be a little confusing because you’ll also need to add state rates plus local tax rates, which could be any combination of state, county, city and district tax rates.
However, if you have nexus in a state where you are not based, you’re generally considered a remote seller. In many states, even origin states, if you are a remote seller with nexus in that state, you’re required to collect tax in a destination-based model. For example, if your home state is Texas, you’ll collect in accordance with origin-sourcing rules. However, if you’re an out-of-state seller in Texas, you’re required to collect via destination sourcing. This adds a bit more complexity to your sales tax requirements as your business grows and the number of states where you have nexus multiples.
Collecting sales tax as an eCommerce store
In addition to knowing how much to charge your customers, you’ll also want to make sure you learn the rates on the products you sell. Some goods and services are taxed at specific rates (Clothing in NY), reduced rates or are fully-exempt from tax altogether. While groceries and prescriptions drugs are typically taxed at reduced rates or exempt from sales tax in many states, digital downloads are considered products and are now taxable in as many as 17 states.
It’s highly recommended to establish a relationship with a sales and local tax (SALT) expert who can guide you through a state’s complex sales tax rules. Each state has its own Department of Revenue (or a variation) website and will typically have resources that can help with sales tax calculations and current legislation.
Always file “zero returns”
It might not seem obvious, but in many states, you’ll also need to file a zero return even if you didn’t sell anything during your filing period. It’s a common mistake online retailers make when filing sales tax returns, but it’s crucial in order to keep your permit valid. Filing a zero return lets the state know you still intend to be open for business, you just didn’t sell anything during a specific time frame. Failing to file a zero sales tax return could be cause for a penalty, so don’t skip this important step.
Several states provide discounts to filers for things like filing on-time state returns. The discounts will often let you keep a small portion of the tax you collected, so don’t delay filing your sales tax returns. To see if your state qualifies for any discounts, here’s a list of states that currently have sales tax discounts.
Become a sales tax expert
If one thing is constant, it’s that sales taxes change frequently and belong to the states to decide. The best advice to any e-commerce business owner is to closely monitor your state laws and find a reputable sales tax software provider to guide you. Read the reviews on sites like G2 Crowd to find the right provider for your business. As the tax laws change, nexus thresholds evolve, and new goods and services become taxable, you’ll want to rely on technology solutions that can calculate your returns accurately and automatically file for you.
To help you stay in-the-know, we recommend joining an online group like this Sales Tax for eCommerce Facebook group, filled with knowledgeable experts, small business owners, CPAs, and newcomers alike who ask and answer daily sales tax questions. Having easy access to common questions can lessen many of the day-to-day issues that might arise when navigating online sales tax.
Now that you understand Internet sales tax basics, the next step is to find the right sales tax software program and get back to enjoying the more rewarding sides of online retail.
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