Despite the easy access people have these days to the internet, selling products online is not as simple as it may seem. There are certain tax regulations that need to be followed. To make things even more difficult, each state has its own tax rate and requirements. Thus, if you plan on running an online business and sell products to customers in the U.S, you need to know how eCommerce sales tax works.
What Is E-Commerce Sales Tax?
When somebody buys a product from your online store, a small percentage of the amount they pay goes to the state in the form of tax. This is why sales tax is also called “pass-through tax.” You, as a retailer, have to collect tax from your sales and pass it to the state.
Each state in the U.S. has different rules when it comes to sales tax. What’s more, some local districts have their own taxation rules, so this can make the whole taxation process even more complicated.
Do You Have to Charge Sales Tax for E-Commerce Sales?
Generally speaking, yes. Even if your store operates online exclusively, you have to charge taxes on the sales you make. On top of that, you have to charge taxes according to the taxation rules of each state.
However, some states will require you to collect tax only if your sales exceed a certain limit. For instance, if your online business doesn’t generate more than $5 million from sales annually, the California Department of Tax and Fee Administration (CDTFA) allows you to delay payment on up to $50,000 of sales tax. More importantly, you don’t have to pay any interest on that deferral.
What Is a Sales Tax Nexus, and How Does It Affect E-Commerce Business?
A “nexus” is the link between your online business and the respective state. In plan terms, a sales tax nexus lets a state know that you’re doing business on their territory and enables you to pay sales tax to that state. Stores with a physical presence have their nexus in the state where they are located. However, the situation with online business retailers is slightly different.
E-commerce businesses need to establish a sales tax nexus in the states where they want to charge sales tax. The problem for online business owners lies in the laws and conditions that each state imposes. They differ from state to state, so you should contact a tax authority to become informed about collecting sales tax in each state.
How to Adjust to New Sales Tax Laws for E-Commerce?
If you want to lead your online business without worrying about surprise penalties and fines, you need to keep up with new sales tax laws. This is not an easy task. Thus, here are a few tips to ensure your online business is on the same page with new e-Commerce laws.
Decide How You Plan to Track ECommerce Sales Tax Laws
As mentioned earlier, almost every state in the U.S. has different taxation rules. To make things a bit easier for you, Oregon, Alaska, New Hampshire, Delaware, and Montana are states with no sales tax. For sales tax compliance in the rest of the states, you’ll need to set up a plan on tracking all the changes in sales tax laws.
Choose a Point-of-Sale Platform That Tracks Tax Liabilities
A point-of-sale system (POS) can help you immensely with all your online business operations. It is a place where your customers purchase the goods or services you sell. POS platforms work with accounting software that keeps track of the changes in sales tax across different states. For instance, e-commerce platforms like Shopify and Vend provide both POS and sales tax solutions.
Make Sure You’re Monitoring Sales Tax Rates in All States
States in the U.S. constantly update their laws on sales tax rates. In 2019, for instance, California made the decision to introduce sales tax to online sellers. Namely, any seller that made more than $100,000 from selling goods to California’s residents was obliged to pay the California tax.
Almost a year later, California introduced an update to this decision by which it obliged that any businesses that make “three or more sales in a 12-month period is required to hold a seller’s permit.”
California is only one example of how often changes in tax regulation for online businesses are made. Thus, ensure that you monitor sales tax rates in each state.
Tips for Managing E-Commerce Sales Tax
Taking care of your eCommerce sales tax can be challenging, especially if you do it on your own. Fortunately, we’ve compiled a list of tips that can help you charge and remit sales tax properly.
Track Every Penny
When you run an online store, keeping track of each sale is a no-brainer. Knowing how much you earn prevents you from accidentally exceeding certain limits. Thus, you need to hire an accountant or find an accounting software solution online.
Track Each State’s Payment Deadline Dates
Some states may allow tax payment deferrals, like California. Others may not. So, your best bet is to keep track of each tax payment deadline. You can use a reminder app or any other program to ensure you make the required payments in time.
Know-How to Remit Sales Tax
Different states offer different options for remitting sales tax. You should check how you can pay sales tax to each state. Otherwise, you may assume that you’ve made a payment, only for the tax authority to inform you that you haven’t fulfilled your sales tax obligations.
Ensure You Have the Proper Permits
Before you can remit sales tax in a state, you’ll need to obtain a sales tax permit from that state. Each state has its own requirements, so your online business may need to meet multiple standards at once.
Understand the Penalties for Mistakes and Delays
Not conducting online business in accordance with the law can cost you a fortune. States don’t care if you forget to make a payment or make a mistake. You’ll still run into legal issues that can be a huge setback for your business.
Consult an Expert
Getting advice from someone with expertise in this field is always a good practice. Consult a certified public accountant (CPA) or an attorney who’ll advise you on dealing with sales tax properly.
Now let’s take a look at some common dilemmas that online business owners might have.
When You Are Obligated to Collect Sales Tax Online
If you have a sales tax nexus in a state, you’re obliged to collect tax on each sale coming from that state. But how can you know if you have a nexus in a state?
Before the Supreme Court’s decision in the South Dakota v. Wayfair case, a business’s nexus had been based entirely on their physical presence within a state. After this decision was made in 2018, sellers outside a state can establish an economic nexus in that state and collect sales tax. The economic nexus threshold is different in each state. Thus, you want to check if your business is eligible for sales tax remit.
Who Is Responsible for Collecting and Paying Tax on Internet Sales?
You, the business owner. In each state where you have a nexus, you need to collect taxes and pay them to that state within the given deadline. Should you fail to fulfill your sales tax obligations to each state, your business may be penalized.
Do I Need to Collect Sales Tax on Shopify?
You don’t have to worry about eCommerce sales tax if you sell products via Shopify. The platform will collect sales tax for you instead. All you need to do is go to Shopify Settings and set up the sales tax settings.
Do I Need to Collect Sales Tax From Out of State Customers?
If you have a nexus within a state where your customer is located, you need to collect sales tax from their purchase. However, there are two types of sales tax. Most states apply the destination-based sales tax, meaning the sales tax rate is determined according to the destination state’s tax regulations.
On the other hand, some states apply the origin-based sales tax, so the sales tax rate depends on your state’s tax regulations. There are 11 such states, including Arizona, Utah, Virginia, and more.
Running an online business can be excruciating when you do it on your own. You have to manage many different tasks at once and would certainly benefit if someone could take some of your workload and do it for you. So, here’s our recommendation for a service that could help you with your online business.
While you’re creating the best marketing strategy or finding the best deals among a range of suppliers, Bench will handle your bookkeeping.
Bench is an online business accounting service that works specifically with small online businesses. If you sign up for Bench, one of their bookkeepers will guide you through their platform and ask you for information about your business. Also, you’ll get monthly financial reports with detailed expenses and other insights, which can help you in your future financial decisions.
As for sales tax, Bench doesn’t provide tax filing services unless you apply for the Bench Tax as well. However, a Bench bookkeeper will work one-to-one with your tax professional or CPA to facilitate the tax filing process.
For these reasons, we fully recommend Bench as your bookkeeping service. And if you wish to let them handle the whole tax filing process for you, consider purchasing Bench Tax. To add to Bench’s credibility and customer satisfaction, the company currently has a 4.7-star review on Trustpilot.
Keep Your Business Safe
To anyone who wants to run an online store and conduct their business 100% legally, eCommerce sales tax is inevitable. To make things more complicated, each state in the U.S. has different sales tax regulations. So, you need to keep up with all the changes in sales tax laws so that you don’t accidentally make a mistake that will have a detrimental impact on your online business.
Alternatively, you can hire an accounting service like Bench to handle the bookkeeping for you. And, if you opt for their Bench Tax program, you don’t have to worry about sales tax obligations at all and can focus solely on your business.
Whether you choose to do it yourself or hire an expert company, ensure that you collect sales tax so you don’t run into any legal issues.