Online Seller’s Guide to E-Commerce Sales Tax

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.

Why?

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.

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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 who had a physical presence in a state, such as offices or warehouses. That meant online vendors only had to simply 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 will make it clearer for you to understand.

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.

How can you comply with the eCommerce sales tax? 

If you don’t want to leave your business vulnerable to audit, fines, and repayment, this is your go-to guide to stay in compliance with online sales tax. 

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 you have business going on. 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 no charging sales tax to customers in that state.

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.

If you need more detailed information on sales tax permit, check out this blog:

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.

Final thoughts 

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! 

For more financial blogs, check the Shoeboxed Blog


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What You Need To Know About The American Tax System 

It’s no secret that the American tax system is incredibly complex. Many people think it is incomprehensible and unfair, only benefiting corporations and big businesses and not the mass working population.  

To help you understand the American tax system better, we’ll go over how the system works and highlight some major issues that arise in this vast, complicated setup in this post. 

Let’s get to it!

How does the American tax system work?

Once you make over a certain amount of money, you must pay taxes, so it’s crucial to get a general understanding of how the tax system works in the United States.

Overview

The federal government can only function financially through collecting taxes and fees from many different sectors of the economy, and you might not be surprised to learn — the largest sources of government revenues are individual income taxes and payroll taxes.

While nearly all American citizens have to pay taxes, the type and amount of taxes paid are individually different. Well-off Americans pay a larger share of their income in individual income taxes, corporate taxes, and estate taxes compared to lower-income groups. However, lower-income groups pay a greater portion of their earnings to payroll and excise taxes than wealthy Americans.

Overall, the U.S. tax code is progressive, with higher-income taxpayers paying a larger share of their income in taxes. That is true, but high-income Americans can benefit disproportionately from tax breaks, which are also known as tax expenditures. Some find this extremely unfair, and we’ll take a look at that later in this post. 

How it’s managed

The Internal Revenue Code (IRC), generally known as the tax code, is written by Congress, the legislative part of the United States government. The tax code governs tax collection, the application of federal tax laws, and the issue of tax refunds, rebates, and credits. These functions are carried out by the Internal Revenue Service (IRS), a government department of the United States Department of Treasury.

What are the different types of taxes?

There are so many different types of taxes in the U.S. But don’t worry, not all taxes apply to everyone. Below are some examples of the most common taxes:

Income tax 

The U.S. federal income tax is a tax imposed by the Internal Revenue Service (IRS) on the annual earnings of individuals, corporations, trusts, and other legal entities. Federal income taxes apply to all forms of earnings, including wages, salaries, commissions, bonuses, tips, and investment income.

In the U.S.tax system, federal income tax rates for individuals are progressive. As taxable income increases, so does the tax rate. Federal income tax rates range from 10% to 37% and are staggered at specific income thresholds. These are called tax brackets, and income that falls within each bracket is taxed at the corresponding rate.

Capital gains tax 

The tax on the profits generated from an investment after it has been sold is known as capital gains tax, so please note that no taxes are due on stock shares until they are sold, regardless of how long they are kept or how much their value increases. 

The capital gains tax rate in the United States now applies exclusively to income on the sale of assets held for more than a year, also known as long-term capital gains. The current rates are 0%, 15%, or 20%, depending on the taxpayer’s tax bracket for the current year. The short-term capital gains tax is applied to assets that are sold within one year of their purchase date. Ordinary income is taxed on this profit. For most low-to-middle-income taxpayers, this is a higher tax rate than the capital gains rate.

Payroll tax 

A payroll tax is a percentage withheld from an employee’s pay and paid to the government on the employee’s behalf by their employer. Federal payroll taxes are subtracted from an employee’s wages and remitted to the Internal Revenue Service (IRS).

Sales tax 

A sales tax is a government-imposed consumption tax on selling goods and services. The majority of sales taxes are collected by retailers and passed on to the government. Depending on the regulations in the jurisdiction, a business is liable for sales taxes if it has a link or connection to that area, which can be a store or office, an employee, an associate, or some other presence.

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What are the different types of taxpayers? 

We can divide taxpayers into two main categories: 

1. Individuals

Individual taxpayers go into one of 2 groups: citizen or immigrant (an alien is a person who resides within a country’s borders and is not a national of that country). A citizen can also be classed as a resident or a non-resident.

2. Corporations 

Domestic, foreign, and partnership corporations are the three types of corporations. There are two types of foreign corporations: resident foreign corporations and non-resident foreign corporations. 

A foreign corporation engaged in trade or business in the country is referred to as a resident foreign corporation. A foreign corporation that is not engaged in trade or business within the country but receives income from sources within the country is known as a non-resident foreign corporation. 

A partnership is a business arrangement in which two or more people share a company’s ownership and management responsibilities. Because a partnership is not a legal entity apart from its owners, it does not pay taxes.

What Does the Government Actually Do With The Taxes It Collects?

The U.S. government collects income taxes and payroll taxes from individuals and corporate income taxes from companies. The government then distributes the money to different government agencies for specific purposes that benefit or protect the nation and its citizens. Social Security and welfare programs, the education system, national parks, police departments, and the maintenance and development of public infrastructure are all funded by U.S. tax dollars.

What are the main issues with the American tax system? 

Most taxpayers agree that some form or amount of taxation is necessary to fund the government. However, there are many differing views about the size of government and its corresponding funding, the optimal structure of a tax system that’s fair to all, the system’s effective rates, and its impact on different groups in society.

As with all systems, individuals and corporations will do their best to find workarounds and loopholes to use to their advantage. And it is who can take advantage of these loopholes that seems to be unfair, with most taxpayers believing the U.S. tax system favors the wealthy and doesn’t benefit the majority of the population.

Most U.S. taxpayers consider an income tax system that applies higher rates on higher income levels to be fair. At the moment, it doesn’t seem to be that way especially when it comes to businesses, particularly large corporate businesses.

Let’s look at some of these issues in more detail.

1. Higher Benefits for Higher Tax Brackets

Although tax rates on taxable income are progressive, which means big businesses should be paying more, there are ways for these corporations to pay a lesser rate. Ways that lower-income individuals can’t. Let’s have a look at some below:

Exemptions and exclusions for certain types of income—for example, tax-exempt interest paid on state and local government bonds.

Special, lower rates for some income categories, such as capital gains and dividends

Deductions for a wide range of expenditures, including some business expenses

These adjustments can result in much lower effective tax rates on the incomes of high-income, wealthy individuals, which lower incomes miss out on. These deductions can also enable taxpayers with extremely high earnings and investment returns to avoid any tax liability at all.

2. Deductions and tax credits

Deductions benefiting taxpayers by lowering their taxable income are regressive. To calculate how much deductions you can take, multiply the amount of your deductible expenses by your marginal tax rate. For instance, if your income is in the top 37 percent tax bracket, every $100 saved from income that would otherwise be taxed at this rate saves the taxpayer $37. If the appropriate rate is 24%, a $100 reduction in income would result in only $24 in savings. 

Meanwhile, with a tax credit, a taxpayer can only save a flat rate that is equal for everybody. Regardless of income level or tax category, a 20% tax credit will save taxpayers $20 in tax liability for every $100 spent.

However, most tax credits are non-refundable. If your tax credits are higher than your tax liability, you won’t be able to take advantage of the credits’ benefits fully. 

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3. Corporate Tax Avoidance

Currently, the tax law generally applies a corporate income tax of 21%. However, many U.S. corporations pay far lower rates or no tax at all because of substantial business write-offs and aggressive tax planning. Once again, these write-offs just aren’t available to the vast majority of U.S. taxpayers.

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The bottom line 

Most Americans would like to see a less complex and fairer tax system. The tax code is constantly being updated, which can be even more confusing. New guidelines, new forms, and new criteria are always being introduced. Stay on top of your taxes and up-to-date with the latest tax changes by subscribing to the Shoeboxed blog. We’re here to help!

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What Is the Supreme Court Cannabis Tax Ruling?

The legalization and taxation of cannabis remains one of the hottest trends in state taxation. As the New Mexico Supreme Court tax ruling declares that cannabis purchases by medical cannabis patients should not be subject to gross receipts tax, you might be interested to know that medical products from weed are also not taxed in several states. But what states, exactly? 

This article will walk you through the legalization and taxation of cannabis in different states in the US. 

States that levy tax on cannabis products 

Cannabis, also known as marijuana, has been used as a drug for both medical and recreational purposes and in various traditional medicines for centuries. Medical cannabis is legal in 37 states, Washington DC, and the US Virgin Islands. 

Most states do not levy a tax on cannabis purchases because they exempt prescription medication purchases from their general sales tax. Each jurisdiction has its own criteria for when cannabis can be prescribed, at what amounts, and the process for issuing medical cannabis licenses to qualified consumers. 

On the other hand, other states may tax cannabis at a lower rate than other items sold at retail. Medical cannabis purchase taxes are generally low and equal to the state’s general sales tax rate. Therefore, these taxes are not classified as “marijuana taxes.” 

This is mainly because cannabis is still federally classified as a prohibited drug in the US. So, while many states have legalized cannabis for medical purposes, prescribing it remains nearly always illegal at the federal level. Moreover, the FDA has only approved a certain number of cannabis derivatives for prescription medication use.

The table below shows how cannabis tax differs across states.

supreme court cannabis tax ruling
The cannabis tax rate in each state (Source: taxpolicycenter.org)

How is cannabis taxed across states?

In general, state and local governments tax medical cannabis in three main ways.

  • Price-based. Price-based taxes are similar to general sales taxes in that the consumer pays a tax on the purchase price, which is then remitted to the state by the retailer. Like other excise taxes, the tax rate is usually higher than the state’s general sales tax rate. Most states impose this tax at the point of sale (i.e., the consumer pays the tax together with the price of the goods at checkout). Meanwhile, a few other states apply their percentage of price tax to wholesale transactions. For instance, the cultivator or distributor pays the tax), and this cost is passed on to the consumer in the final purchase price. Some states also allow local governments to impose a percentage of sales tax, but usually with a limit on the maximum rate. 
  • Weight-based. These taxes are similar to cigarette taxes, but the tax is based on the cannabis product’s weight instead of taxing per pack of cigarettes. The wholesale transaction is subject to this tax. It means that the cultivator or distributor pays the tax, then includes it in the final cost of the consumer purchase. States that apply this form of tax usually have varying tax rates for different types of cannabis. For instance, California taxes cannabis flowers at $9.65 per ounce, cannabis leaves at $2.87 per ounce, and fresh plant material at $1.35 per ounce.
  • Potency-based. Potency-based taxes are similar to alcohol taxes, except that instead of taxing drinks with a higher percentage of alcohol at higher rates (e.g., the tax rate on liquor is higher than beer), the tax is based on the amount of THC in the cannabis product. Currently, Illinois is the only state applying a THC-based tax. It levies a 10% tax on items with a THC concentration of 35% or less, and a 25% tax on those with THC exceeding 35%. All cannabis-infused products are subject to a 20% tax. New York has also established a potency-based tax recently. However, it taxes per milligram of THC, with different amounts applied to different items.

Some states levy more than one of these taxes. Additionally, some states and localities levy their general sales tax on the purchase of cannabis in addition to their excise taxes.

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The bottom line

There is still much confusion regarding the supreme court cannabis tax ruling. Still, as more states open legal marketplaces and more research is carried out to understand the externalities of consumption, business owners will better understand this industry’s taxation. 

Don’t forget to subscribe to the Shoeboxed blog for more helpful tax and bookkeeping knowledge on various industries! 

About Shoeboxed

Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format in just one click by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes.

Access your Shoeboxed account from your web browser or smartphone app. Stay audit-ready with Shoeboxed for FREE now!