Going into business for yourself is pretty great. You set your own hours, hire your own teams, occasionally work in your pajamas, and watch the revenue pour in. With that said, if you’re like most people, you probably don’t put “collecting sales tax” at the top of your be-your-own-boss benefit list. Yet, it’s the necessary evil all online retailers must face.
If internet sales tax overwhelms or confuses you, you’re not alone. Even when you think you’ve got it figured out, you soon realise yesterday’s laws might not be valid tomorrow.
Because there’s no such thing as federal sales tax, it falls to the states to set their own rules and, ultimately, to you to digest and follow. Sales tax regulations change frequently across states as well as marketplace platforms like Amazon FBA and eBay. Trying to understand where, when, and how to collect sales tax can be tough for ecommerce business owners to navigate.
To help with this, we’re breaking down online sales tax reporting and collection into a few simple steps.
Do you have to charge sales tax for online sales?
Simply put, yes. Unless you’re conducting business in one of the five states that don’t have sales tax, you’re required to charge and collect tax. To date, the states that don’t have sales tax are Alaska, Delaware, Montana, New Hampshire, and Oregon. Even Washington, D.C., has sales tax, so there are 46 different states and regions to comply with. (To help, here’s a fun way to remember the five states with no sales tax.)
What is sales tax nexus and why is it important?
Now that you know the states that require you to collect sales tax, you’ll need to know where and when your business specifically is compliant. Sadly, it’s not as easy as checking a box based on the state where your company is located, but instead, there are several nexus rules that determine where you’re liable.
The literal meaning of the word nexus is to bind, join, or tie. In the sales tax world, nexus is a fancy way for the state to decide if you’re conducting enough business in their state to pay sales tax.
Nexus can be defined in multiple ways, but the most popular two are physical and economic nexus. We’ll cover economic nexus in a minute, but first, physical nexus typically requires a physical presence in the state. If you have an office location, employees (even ones who work from home), inventory in a warehouse (think Amazon FBA), or your own warehouse, you have physical nexus.
Up until June 2018, physical nexus was all you needed to keep up with in order to be compliant. In June, the U.S. Supreme Court overturned a decades-old decision in a case known as Wayfair v. South Dakota. As a result, economic nexus was born.
This landmark decision gave the power back to the states to apply their own sales tax laws to out-of-state retailers regardless of physical presence.
State nexus thresholds explained
There’s no one-size-fits-all nexus threshold. Some states require a total sales figure to trigger nexus, while others are based on sales AND transactions. Some states only have a notice and report, some have hard and fast laws, and others have plans to enforce economic nexus laws at a later date.
Different states, different tax laws
TaxJar makes it easy to keep up with state laws, their active dates, and thresholds with this economic nexus state map that is amended every time the states update their legislation. As you start looking at your sales into states with active nexus laws, our free Sales and Transactions Checker tool is helpful to determine where you have nexus, if it changes, and how much you owe. You can automatically see the total transactions made or revenue generated to know where you exceed the economic thresholds.
While many states mimic the same thresholds of the South Dakota law, each state can technically name their own threshold, be it the number of sales transactions, sales brought into the state, or a combination of both. For example, California recently announced their thresholds were $100,000 in sales OR 200 transactions in the previous calendar year.
But Connecticut’s law is $250,000 AND 200 transactions over the last 12 months, making it a little higher of a threshold. The good news here is that many states have a grace period to help you understand what you owe and the time frame to pay it.
Marketplace sales tax laws
An additional factor to consider around collecting sales tax revolves around laws for marketplace facilitators. A marketplace facilitator is a business or organisation like Amazon or Etsy that contracts with third parties to sell goods and services on its platform.
These platforms list the products, take the payments, collect receipts, and, in some cases, assist in shipment. Marketplace facilitator laws refer to the legislation surrounding the sales tax responsibilities of these facilitators.
For sellers, marketplace facilitator laws mean that your facilitator will handle collecting and remitting sales taxes on behalf of your sales in states where your marketplace is compliant. You can find the most current status of all the marketplace laws here.
How to get a sales tax permit (in 4 steps)
Now that you know where you have nexus and if you need to collect, you’ll need to register for a sales tax permit. In most states, it’s against the law to collect sales tax unless you’ve applied for and received a permit. So, it’s an important step you can’t skip if you’re an online business owner.
While each state differs, here are a few steps everyone needs to follow in order to register with the state to collect sales tax:
- Make sure all of your vital information, like your EIN (employee identification number) and any information that identifies your business is easily accessible.
- Visit your state’s Department of Revenue website. Each state has one.
- Click on or search for the “Sales and Use Tax” section within the website.
- Click the link to register your business! It’s that easy.
Once you’ve submitted your application, you may be asked for more information about your business, such as gross sales or what type of products you sell. After the state has reviewed your application, you’ll receive your tax ID number, which you’ll need to collect sales tax. This process takes a few weeks and will also come with instructions on how to file your tax returns.
Do I need a permit if my marketplace collects?
Although it may seem like you’re off the hook if your marketplace platform collects on your behalf, there’s still work to be done. Sellers in a state that imposes marketplace facilitator laws must still keep their permit valid. A marketplace facilitator will only handle the sales tax on transactions sold through its platform.
So, if you’re selling on your personal website, in addition to Amazon, and you have nexus, you’ll still need to collect taxes through the sales on your own website.
Location-based sales tax
In order to charge and collect sales tax from your customers, you’ll need to also take into consideration if your business is located in an origin-based state or a destination-based state.
As we mentioned earlier, having economic nexus in a state can render you a “remote seller” even if you’re not in the state. In this scenario, depending on if you’re a remote seller in an origin or destination-based state, you’ll need to pay use tax, which is basically state tax applied to remote sellers.
As a rule of thumb, the state treats in-state sellers and remote sellers differently. If you’re considered a remote seller, most of the time the state wants to charge you the sales tax rate of where you’re shipping the items.
There are 12 origin-based states, and they require sales tax to be collected based on the seller’s business location. If you live in one of the following states, you should be charging the tax rate for where your business is located. That rate could include a combination of state, county, city, and district tax rates. Origin-based states include Arizona, California, Illinois, Mississippi, Missouri, New Mexico, Ohio, Pennsylvania, Tennessee, Texas, Utah, and Virginia.
Destination-based states determine the correct sales tax rate based on the buyer’s home state (where the buyer is located) or the destination of the sale. Where this can get tricky is when you’ve got to combine state rates plus local tax rates. For everyone in destination-based states, you need to charge your customers the rate where you’re shipping the products to. Ultimately, this could include any combination of state, county, city, and district tax rates. Some of the destination-based states include Florida, New York, North Dakota, and many more.
Collecting sales tax for an ecommerce store
Knowing how much to charge your customers and how to physically charge them are two different things. Your state will tell you how much to charge on the products you sell when you receive your sales tax permit.
If you’re selling an assortment of products, you may find the rates change for different classes of goods, while some aren’t taxable at all. State rates vary across the country, and local sales tax can be charged at the city and county levels as well.
Calculate the sales tax to charge
To ease these complexities, states’ Department of Revenue websites typically have resources available to help with calculations, or there are several sales and local tax (SALT) experts who can guide you. TaxJar recommends these SALT partners. Or, if you just need a sales tax calculator, we can help you determine your personal state and local tax rates.
Charge customers on their purchases
Because most modern online sellers use some type of payment software, adding sales tax to the checkout process is usually attached to an online website cart or marketplace that you’ll need to set up. This step varies among software programs, but you typically need to give some information and set up a tax calculator on your site to help you calculate the accurate tax rates.
Sales tax considerations
In addition to all of the information above, there are additional considerations that you’ll need to keep in mind to successfully navigate sales tax as an ecommerce merchant.
Always file “zero returns”
Even if you sold no products during a specific time period, the state still needs to know this, rather than think you are avoiding remitting the taxes you collected. In fact, you could even be charged a penalty if you don’t file a zero return by your filing due date every time. This zero return lets the state know how much, or in this case, how little sales tax you collected in order to keep your business permit current.
Tax discounts are often provided at the state level and are given to on-time filers to keep a small portion of the sales tax they collected. Even the smallest amount could still make a difference for your overall bottom line, so if you can, file on time and in full. And in some cases, the timely filing discount is enough to cover the cost of TaxJar’s Autofile program, making it easy and free to use automation for your sales tax filings.
To see if your state qualifies for any discounts, here’s a list of states that currently have sales tax discounts.
South Dakota v. Wayfair, Inc. (Wayfair Case)
On June 21, 2018, in the case of South Dakota v. Wayfair, Inc., the Supreme Court ruled that states in the US have the right to collect sales taxes on purchases from out-of-state retailers. This was a historic decision in terms of ecommerce regulation.
History of the ruling
The Wayfair decision was in response to a 1992 case, Quill Corp. v. North Dakota. The state believed Quill should pay sales tax on their sales to North Dakota residents. The problem, as Quill saw it, was that they only sold their products via catalogues and weren’t even located in North Dakota. This meant they had no warehouses, offices, or employees in the state, or rather, no physical nexus.
In a big win for Quill, The Supreme Court decided that North Dakota did not have the power to collect sales tax on out-of-state businesses. The state could only impose the sales tax if the state had nexus. Without such, North Dakota had no choice but to admit defeat.
While catalogue businesses everywhere rejoiced, brick-and-mortar stores began to worry. Knowing out-of-state retailers could sell similar goods to state residents with no imposed sales tax, shop owners were afraid of losing customers.
Eventually, ecommerce took off, leaving state revenue departments and store owners alike fired up over potential lost revenue. The movement to “Kill Quill” was born, urging the Supreme Court to take another look at the Quill case and hopefully overrule it.
Neighboring state South Dakota quickly took action and enacted its own “Kill Quill” law that focused less on physical nexus and more on the revenue or transactions generated into that state. South Dakota continued its efforts to collect on out-of-state retailers, resulting in the lawsuit we now know as South Dakota v. Wayfair, Inc.
Different states now require different online sales tax
States can now require online sellers to collect and remit sales tax in states where they do not have nexus. Whether or not you will need to collect and remit sales tax in a certain state depends on that state’s economic nexus criteria.
US businesses are now required to comply with sales tax regulations on a state-by-state basis, rather than only in the state(s) where their company has a physical presence.
Internet Sales Tax FAQs
Here are several frequently asked questions about internet sales tax for ecommerce businesses:
Which states require sales tax for online sales?
The following states require sales tax to comply with economic nexus: Alabama, Hawaii, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, New Jersey, Nevada, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, Vermont, Washington, and Wisconsin.
Which states have no online sales tax?
The following states do not have an internet sales tax: Alaska, Delaware, New Hampshire, Montana, and Oregon. You can easily remember the five states with no sales tax by their acronym NOMAD.
Do I charge out-of-state customer sales tax?
Generally, you collect your state’s sales tax when the order is placed within or delivered to your own state. In most states, you should not collect local sales tax on out-of-state orders. If an out-of-state customer places an order using their computer for delivery to another state, then you do not collect your local sales tax.
Does Shopify automatically collect sales tax?
Yes! Shopify automatically collects sales tax for purchases made on your Shopify store.
What does Nexus mean for sales tax?
Nexus refers to a connection. In tax law, the term nexus describes the tax presence of a business in a particular state(s). When it comes to sales tax, each state has their own rules, but here are a few possible cases:
- If the business has a physical location in the state
- If resident employees work in the state
- If your business has property in the state
- If an employee does regular business in the state
Sales tax nexus is definitely a tricky topic, but our best advice is to closely follow your state and county laws as they continue to change and evolve. Joining a good online community where you can pose questions should you have them can also be useful. TaxJar’s Sales Tax for eCommerce Facebook group is filled with knowledgeable experts, small business owners, CPAs, and newcomers alike who ask and answer daily sales tax questions.
Finding a good sales tax software to help you with due dates, knowing the exact amounts to file, and even continually updating you around changing legislation can also alleviate many of the potential headaches caused by trying to understand sales tax. With TaxJar, you can solve several of the issues discussed above, including learning:
- Where you have nexus
- When to file sales tax
- How much you owe
- Which states have sales tax
- Which states have marketplace facilitator laws
- How to discount your sales bill
Now that you know the ins and outs of online sales tax, you can take a deep breath and cross “understand collecting sales tax” off your list of to-dos.
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