Sales Tax Basics for eCommerce Sellers
[ Following is an excellent article from our friends at TaxJar.com. ]
Sales tax is one of the more mysterious aspects of being an online seller. It’s not intuitive, it isn’t fun and worst of all – it isn’t profitable! However, handling sales tax is a necessary administrative chore, and this post will detail how to quickly and easily comply with sales tax in your eCommerce business.
Sales tax is governed at the state level
One of the biggest sales tax surprises new sellers often discover is that there is no federal sales tax in the U.S., and the IRS has nothing to do with sales tax. Instead, sales tax is governed at the state level. Forty-five U.S. states (and Washington D.C.) all have a sales tax, and states and local areas within states use sales tax collected by retailers to pay for budget items like schools, roads and public safety.
As an online seller, you’ll be required to collect, report and file sales tax in states where you have a sales tax obligation. Let’s have a look at the steps to sales tax compliance for online sellers.
Step 1: Determine where you have sales tax nexus
“Sales tax nexus” is just a fancy way to say an obligation to collect sales tax in a state. Online retailers always have sales tax nexus in their home states, but certain business factors can create nexus, and thus the need to collect sales tax, in other states, too. Those factors include:
- A location– an office, warehouse, store, or other physical place of business
- Personnel– an employee, contractor, salesperson, installer or other person doing work for your business
- Inventory– Most states consider storing inventory in the state to cause nexus even if you have no other place of business or personnel
- Affiliates– Someone who advertises your products in exchange for a cut of the profits creates nexus in many states
- Selling products at a tradeshow or other event– Some states consider you to have nexus even if you only sell there temporarily
Each state’s sales tax laws are slightly different, so you can read about what each state considers to create sales tax nexus here. If you have nexus in a state, state laws requires that you collect sales tax from buyers in that state.
Step 2: Register for a sales tax permit
So you’ve determined you have sales tax nexus. Your next step once you’ve determined you have nexus in a state is to register for a sales tax permit with that state’s taxing authority. This is generally called the “[State] Department of Revenue,” but it may go by another name, like the “California Department of Tax and Fee Administration.”
You can register for a sales tax permit online. Once you have registered, you will receive a sales tax permit, along with instructions on how often and by what due dates to file sales tax.
Most states want you to file either monthly, quarterly or annually. How often they want you to file generally depends on your sales volume. The more revenue you gross in that state, the more often they want you to pay. This means high-volume sellers usually find themselves filing and paying sales tax monthly, while others may find themselves filing and paying quarterly or annually.
Most state’s set the sales tax due date as the 20th day of the month after the taxable period, but other states set different dates.
Don’t forget to register! Most states consider it unlawful to collect sales tax from buyers without a sales tax permit, even if you didn’t realize you needed one.
Step 3: Set up sales tax collection
Once you have your sales tax permit, you should then set up sales tax collection on your online shopping carts and marketplaces. Luckily, most sales channels make it fairly easy to set up sales tax collection.
A few important things to remember:
- Be sure to set up sales tax collection on all shopping carts and marketplaces for all nexus states – Once you have nexus in a state, you are required to collect sales tax from ALL buyers in that state, so be sure you have sales tax collection set up on all of your channels.
- Determine if you should charge sales tax on shipping – About half the states with a sales tax require online sellers to charge sales tax on shipping charges. You can find out if your state requires you to charge sales tax on shipping charges here.
Step 4: Report and file sales tax
Soon enough, your first sales tax filing due date will arrive. This is where sales tax filing can get complicated, especially if you sell on multiple channels.
The majority of states want you to break down how much sales tax you collected from buyers not just within the state, but by city, county and other special taxing district, too. This means that if you do this manually you’ll be required to figure out what percentage of each transaction went to state tax, county tax, city tax, transportation district tax, etc. This become a nitpicky nightmare!
That’s where sales tax software comes in. With sales tax automation software you can connect all the online shopping carts and marketplaces you sell on and receive a return-ready sales tax report with all your sales data broken down by city, county, and other districts just the way the state wants to see it. Whew!
Sales tax software will even AutoFile your sales tax returns for you, so you never have to worry about remembering a deadline or filling out a mind-numbingly detailed sales tax form ever again.
There are a couple more important things to think about when it comes to reporting and filing sales tax:
- Always file a sales tax return by the due date – File a sales tax return even if you didn’t collect any sales tax. This is called filing a “zero return” and many states will assess a fine if you fail to file. Unfair, but true!
- Don’t discount sales tax discounts – On the other hand, about half the states that have a sales tax will allow online sellres who file on time to keep a small (1-2%) portion of the sales tax you collected. This is free money, so don’t leave it on the table! Here’s a list of states with sales tax discounts.
I hope this post has resolved some of the mystery around sales tax for online sellers. For a whole lot more info, check out our Sales Tax 101 for Online Sellers guide, or ask a question in our Sales Tax for eCommerce Sellers Facebook Group.
– Contributed by TaxJar.com. TaxJar is a service that makes sales tax reporting and filing simple for more than 10,000 online sellers.