The fundamentals of eCommerce are simple - purchase or create a product and sell it online. It’s the nagging administrative hassles that aren’t quite so easy to handle. And of those, the administrative detail that gives online sellers the most trouble is sales tax.
This guide will provide online sellers with an overview of everything you need to know about sales tax, along with step-by-step instructions on when and how to collect sales tax from your customers, report the sales tax you collected, and successfully file sales tax returns with your state.
Let’s dig in.
What is sales tax
Sales tax is a percentage of a retail sales transaction which is collected at the point of a retail sale. This small percentage, usually 4-8% of the sale price of the item, is levied by states and local areas, and used to pay for government budget items like infrastructure, education and public safety. Retailers, including online sellers, collect the sales tax and then later remit it back to the state taxing authorities by filing a sales tax return.
There is no federal or central sales tax in the US. Instead, forty-five US states and Washington DC all have a sales tax. States can vary on everything from what products and services are taxable, to how much sales tax should be collected, to bureaucratic details like what month(s) and dates sales tax returns are due. This can make sales tax overly confusing, especially for sellers who have sales tax obligations to more than one US state.
Fun fact: The five states that do not have a sales tax are New Hampshire, Oregon, Montana, Alaska and Delaware, and you can remember these states by their acronym “NOMAD.”
Who has to collect sales tax
Most online sellers will find that that are required to collect sales tax. In order to be required to collect sales tax, your business activities need to meet two criteria:
- You have sales tax nexus in a state
- The products and/or services you are selling are taxable
Let’s explore each of these factors.
What is a Sales Tax Nexus
Sales tax nexus is a legal term that means in simpler language a “significant presence” in a state. In the US, as of right now, retailers are only required to collect sales tax from buyers in states where they have sales tax nexus. While it’s important to remember that each state’s sales tax rules and laws are different, the following business business activities generally cause nexus in every US state:
- 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 temporary event – Some states consider you to have nexus even if you only sell there temporarily
If you have sales tax nexus in a state, chances are high that you are required to collect sales tax from buyers in that state. However, if you have questions about whether your business activities in a state constitute nexus, we recommend contacting either your state’s taxing authority or a vetted sales tax expert.
What is Product Taxability
The second business activity that determines whether or not you are required to collect sales tax is if the products you sell are even taxable. Nearly every piece of tangible personal property - from toothbrushes to children’s toys to furniture -- is taxable. However, some states have legislated that some items are not taxable. These non-taxable items are generally products that are considered necessities, such as food, clothing and medicine.
If you are unsure about whether or not the products you sell are taxable, you can check with your state’s taxing authority.
A note for those who sell services: Traditionally, services have not been taxable. However, many states have recently changed their laws to tax some services. It is now a good idea to also check with your nexus state(s) to determine if the services that you sell are subject to in-state sales tax.
Before you Begin Collecting Sales Tax
Once you have determined in which states you have sales tax nexus and that the products you sell are taxable, your next step is to register for a sales tax permit. Since sales tax is governed at the state level, retailers register with the state taxing authority, usually called the “[State] Department of Revenue.”
It’s important to register for a sales tax permit before you begin collecting sales tax, because most states consider it unlawful to collect without a permit, no matter if your intentions were honest.
If you register online, you’ll usually receive your sales tax permit anywhere from instantly to within 10 days. It’s important to read your sales tax permit documentation once you receive your permit. For example, the state will assign you a sales tax filing frequency and due date along with your sales tax permit number.
Sales tax filing frequencies fall generally either monthly, quarterly or annually, depending on your sales volume in the state. And while most states set their sales tax due date as the 20th of the month following the taxable period, some states set other dates, such as the 15th, 23rd or final day of the month.
And once you have your sales tax permit in hand, your next step is to set up sales tax collection on the online shopping carts and marketplaces on which you sell.
How to Collect Sales Tax from Buyers
If you sell on the major online shopping carts and marketplaces -- like 3dcart, Amazon, Walmart and more -- then you are in luck. Most online shopping carts and marketplaces have robust sales tax collection engines that allow you to collect sales tax after a short set up process.
However, it’s still important to understand some of the basics of sales tax collection.
There are a couple of important things to consider when collecting sales tax.
Shipping taxability - If you charge for shipping, you’ll find that some states consider shipping charges subject to sales tax. Most online shopping carts and marketplaces allow you to choose whether to collect sales tax on shipping.
Origin and destination based sales tax states - In most cases, as an online seller, you will charge sales tax based on your buyer’s ship to address. However, in limited instances, you may only be required to collect sales tax based on the sales tax rate at your location. If you are unsure what rate to charge, double check with your state’s taxing authority.
How to File and Pay Sales Tax
Before you know it, your sales tax filing due date will roll around. This is where sales tax can become especially tricky. This is because states want you to report how much sales tax you collected not only from buyers within the state, but where exactly in that state your customers received the item. So for example, you’ll fill out line items on a sales tax form showing how much sales tax you collected based on rates in each city, county and other special taxing district.
That’s where sales tax software takes over. A sales tax automation solution will connect with the online shopping carts and marketplaces on which you sell, and create a return ready sales tax report in just the way the state requires. Better yet, you can use sales tax automation to AutoFile your sales tax returns so you never have to touch another sales tax filing again. After all, sales tax is a time-consuming, non-profitable hassle.
There are a couple more important things to keep in mind when filing sales tax:
- Always file by the due date - States require that you file a sales tax return by the due date, even if you didn’t collect any sales tax over the filing period. Be sure to file a “zero return” or, in many states, you’ll still face a late filing penalty.
- Don’t forget your discount - A little over half the states with a sales tax offer a small incentive to sales tax payers. They’ll let you keep a small percentage (usually maxing out at about 2%) of the sales tax you collected from buyers. This is free money, so don’t leave it on the table!
I hope this short guide has helped you wrap your mind around the sales tax compliance obligations of online sellers. If you have questions or something to say, feel free to start the conversation in the comments!