Sales Tax for eCommerce Sellers, Demystified
When eCommerce sellers think about "tax," their first thought is often income tax. But there's actually another type of tax you'll find that you deal with a whole lot more in your eCommerce business: the humble sales tax.
Forty-five states and Washington D.C. all have a sales tax. As an eCommerce seller, if you live in a state with a sales tax and are selling taxable items, then you most likely are required to collect sales tax from your customers.
This post will explain the basics of sales tax and give you some pro tips for handling this ubiquitous administrative task with ease.
What is sales tax?
As a consumer, you're probably familiar with paying sales tax. It's that small percentage tacked onto a purchase. But did you know that that sales tax is remitted back to the state to fund budget items like schools, roads and public safety?
Sales tax rates and rules vary, and that's because sales tax is governed at the state level. There is no "federal sales tax." That's why you might find that sales tax is due on the 20th of the month in Georgia and on the 31st day of the month in California. And that also why textbooks are taxable in California but not taxable in Minnesota. Each state's sales tax rules are slightly different.
As an eCommerce seller, you are required to register with the state and collect sales tax when you have "sales tax nexus" in a state.
Sales Tax Nexus 101
Sales tax nexus is just a fancy legalese way to say "significant connection" to a state. If you have nexus in a state, then that state considers you on the hook for charging sales tax to buyers in the state. You'll always have sales tax nexus in your home state, but you may find that certain business activities create nexus in other states, too. They 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
- A drop shipping relationship – If you have a 3rd party supplier ship to your buyers, you may create nexus
- Selling products at a tradeshow or other event – Some states consider you to have nexus even if you only sell there temporarily
To help you determine whether or not your business activities give you sales tax nexus, you can find out what every state's laws have to say about nexus here.
If you determine that you have sales tax nexus in a state, your next step is to get registered with the state to collect sales tax.
Registering for a Sales Tax License
Before you begin collecting sales tax from buyers in a state, that state requires that you register for a sales tax license (sometimes called a sales tax permit.) Don't skip this step before you begin collecting! Most states consider it unlawful to collect sales tax from your customers without a permit.
You register for your sales tax license with your state's taxing authority, which is usually called the [State] Department of Revenue. Check here for guides on how to register for a sales tax license in each U.S. state.
When you register for a sales tax permit, the state will assign you a sales tax filing frequency and give you sales tax due dates. How often you file sales tax generally depends on your sales volume, so you might find yourself filing either every month, every quarter or annually.
Once you have your sales tax license in hand, your next step is to ensure you're collecting sales tax from your customers.
Collecting Sales Tax
If you own a brick and mortar store, your sales tax collection is fairly simple. You look up the sales tax rate at your address, and charge the same amount to all of the customers who walk up to your cash register.
But with eCommerce, charging the right amount of sales tax is a little more complicated. Most states are "destination-based" sales tax states, meaning that the point of sale (i.e. the location where you are supposed to charge sales tax) is your buyer's ship to address. Since, in most states, the sales tax rate can vary from locality to locality, you may find yourself charging one buyer in South Carolina 6% sales tax and another buyer in South Carolina 7%.
Fortunately, most eCommerce platforms allow you to set up automatic sales tax collection from your customers. For help getting set up, check out our guides on setting up sales tax collection on the most popular eCommerce platforms.
Report How Much Sales Tax You've Collected
Okay so you're all set up and have been collecting sales tax from your customers. Before you know it, your sales tax filing due date will roll around.
When that happens, its time to report how much sales tax you've collected from your buyers. Each state wants this in a slightly different format, but for the most part they want to see how much sales tax you collected not just within the state, but within each of that state's cities, counties and other local taxing jurisdictions. This can be a time consuming and frustrating task, especially if you sell on multiple eCommerce platforms. Trying to find sales tax reports in the backend of your eCommerce shopping cart, and then to combine them into one spreadsheet is never fun!
That's where sales tax automation comes in. With a sales tax automation solution, you can connect your eCommerce shopping carts and marketplaces just one time. From then on, your sales tax will be broken down for you by state, county, city and other special taxing districts. You'll be able to login and look at return-ready reports. And if you're really sick of sales tax, you can even AutoFile your sales tax returns so you never have to look at a sales tax form again!
Speaking of your returns, the next step after you've figured out how much you've collected is…
File Your Sales Tax Return
Now that you have all of your sales tax collected in handy report, it's time to login to your state's department of revenue filing site and file your returns. You should receive information on how to file after you receive your sales tax permit.
There are a couple of important things to remember about filing:
- File even if you didn't collect any sales tax – States consider your sales tax return a "check in." So even if you didn't collect any sales tax over the taxable period, be sure to file a sales tax return. Failing to file can result in a fine or penalty. Nobody wants to pay a fine when you didn't owe any sales tax in the first place!
- Take advantage of discounts – About half the states with a sales tax also have a heart. They realize that asking merchants to collect sales tax on their behalf creates a burden. So they allow you to keep a very small percentage of the sales tax you've collected if you file on time. (Psst! If you choose to AutoFile your sales tax returns with TaxJar, you get to keep the discount.)
And that's it! Now you're practically a sales tax master. If you have questions or want to know more about sales tax, check out our comprehensive Sales Tax 101 Guide or ask a question over in the Sales Tax for eCommerce Sellers Facebook group.
About the Author
Mark Faggiano is the Founder and CEO of TaxJar, a service that makes sales tax reporting and filing simple for more than 5,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!