If you own an online store with customers from all over the United States, figuring out your e-commerce sales tax can get a little bit complicated.
Because your online store is basically open for business in 50 states, each state has its own unique set of eCommerce sales tax laws.
In this post, we’ll explain what eCommerce sales tax is and whether you need to collect it. We’ll also cover the differences from state-to-state, and how to comply with the e-commerce sales tax.
Let’s get to it!
What is the e-commerce sales tax?
Sometimes known as online sales or internet sales tax, the e-commerce sales tax is a kind of tax that online merchants have to charge and collect from buyers, then remit the taxes collected back to the government.
It is a percentage of your total sales price (before shipping fees), with the percentage varying across areas or states. So basically, eCommerce sales tax is not too different from any other standard sales tax, only that it is for online sales.
You might also be interested in:
- Checkout Conversion Rate: What Is It? And How Can Online Businesses Improve It?
- Record and Deduct Sales Tax Effortlessly With Shoeboxed
- What You Need To Know About The American Tax System
How does sales tax work for e-commerce?
The most fundamental thing for online sales tax is your business must have sales tax nexus.
What does sales tax nexus mean?
Tax nexus is the connection between a business and a state that creates tax obligations. In other words, if you have nexus with a state, you must collect applicable e-commerce sales taxes from your customers in that state.
Not long ago, sales tax nexus only applied to retailers with a physical presence in a state, such as offices or warehouses. That meant online vendors only had to collect sales taxes in states where they had facilities.
However, that is no longer the case due to the 2018 U.S Supreme Court decision in South Dakota v. Wayfair. Under this new rule, states can now define sales tax nexus more broadly, including e-commerce companies with no physical presence within their borders.
Remember, you’ll always be subject to sales tax in your home state. On the other hand, certain commercial activities can also result in sales tax nexus in other states.
As complicated as it is, we’ve listed a few common ways to trigger a sales tax nexus across different states:
- Business facility: an office, warehouse, store, or other physical presence of the business.
- Personnel: anyone who works for you like employees, contractors, salespersons, etc.
- Inventory: storing your inventory even without having any staff.
- Affiliates: anyone who advertises your products in exchange for a cut of the profits.
- A drop shipping relationship: having a third party ship to your buyers may create a nexus.
- Selling products at a trade show: though you only sell there temporarily, some states still consider you to have a nexus.
- Economic nexus: You exceed a state-mandated dollar amount of sales in a state or make over a certain state-mandated number of transactions. The image below graphically depicts transaction thresholds.
Image. State-by-state guide economic nexus laws. Avalara
Ecommerce Sales Tax Across The States
45 states impose sales taxes. The states without sales tax are Alaska, Delaware, Montana, New Hampshire, and Oregon. Among states with sales tax, all but two, Florida and Missouri, currently require remote sellers to collect and remit sales tax.
Most states are still adapting to the changes caused by the Wayfair decision and are still trying to develop a fair system for online entrepreneurs. You’ll have to examine the current requirements for online sellers in each individual state where you have sales to ensure eCommerce sales tax compliance.
Step by step how to comply with the eCommerce sales tax
If you don’t want to leave your business vulnerable to audit, fines, and repayment, this is your step-by-step go-to guide to stay in compliance with online sales tax.
Step 1. Know whether you have sales tax nexus and what products are subject to eCommerce sales tax.
This step alone will require a lot of reading and researching. It would be best if you had a solid understanding of state-by-state sales tax laws, especially the ones where you conduct business. It’s advised to check information on each state’s official website for the most updated and accurate information.
Also, you need to determine whether the products you’re selling are taxable within a state. For example, clothing is not taxable in Pennsylvania, which means you don’t need to charge sales tax to customers in that state.
Step 2. Register for a sales tax permit.
Once you know exactly what states you have sales tax nexus in, the next step is to contact your state’s taxing authority (commonly referred to as the “[State] Department of Revenue”) to register a sales tax permit.
This is an important step you should not skip because, as in most states, collecting sales tax without a permit is considered illegal.
The cost of these permits varies from free to $100, and they have different expiration dates.
For more detailed information on sales tax permits, check out this article, “Sales tax permits: A state-by-state guide.”
Step 3. Collect, report, and file your sales tax returns.
Your state will give you a sales tax filing frequency when issuing your sales tax permit. This is usually done on a monthly, quarterly, or annual basis. The bigger your sales volume in a state, the more frequently the state will require you to file a sales tax return and remit the sales tax you’ve collected.
One important note is even if you didn’t collect any sales tax from your customers during the tax period, you still need to file a sales tax report by the due date. Failure to file a zero return may result in severe penalties in several states.
Taxes are not easy to handle, especially the e-commerce sales tax. But if you do your research thoroughly and follow our guide, we’re sure you will nail it!
Shoeboxed supports multiple methods for receipt capture: send, scan, upload, forward, and more!
You can stuff your receipts into one of our Magic Envelopes (prepaid postage in the US). Use our Shoeboxed app to snap a picture while on the go. Auto-import receipts from Gmail. Or forward a receipt to your designated Shoeboxed email account.
Turn your receipts into data and deductibles with our expense reports that include IRS-accepted receipt images.
Join over 1 million businesses scanning & organizing receipts, creating expense reports and more—with Shoeboxed. Try Shoeboxed for FREE now!