This post is by Mark Faggiano, founder and CEO of TaxJar – a service built to make sales tax compliance easier for multi-channel ecommerce sellers. Even if you’re not based in the U.S., there are some international implications of sales tax you should be aware of!
When you started selling online, chances are you got into it for the thrill of selling your handmade product, making a profit on a thrift store find, or the joys of online arbitrage.
When lost in the thrill of the sale, it’s easy to overlook the nagging administrative details you’ll face. And one of the most vexing of those can be sales tax.
This in-depth guide will walk online sellers through the basics of sales tax, help you determine where, when and how much you’re liable for sales tax, and detail some common scenarios and problems.
Read on for more information. Or if you have a specific question, feel free to skip ahead.
The Basics of Sales Tax in the United States
Forty-five states in the United States, and the District of Columbia, levy a sales tax. Merchants who have “sales tax nexus” in these states are required to charge sales tax to buyers. (More on the tricky issue of nexus further down in the Collect Sales Tax if You Have “Sales Tax Nexus” section.)
Sales tax is considered a “pass-through” tax, because the merchant is only holding the taxes collected before remitting it to state and local taxing authorities at a set time (usually either monthly, quarterly or annually depending on gross sales).
State and sales tax funds are used to fund state projects and initiatives, including schools, roads, public safety departments, etc. Many states get a majority of their revenue from sales tax, which is one reason they’ve been taking a closer look at ecommerce sellers. (More on this in the Current Sales Tax Issues Facing Ecommerce Sellers section).
In the U.S., there is no “federal” sales tax. Instead, individual states administer sales tax. Because of this, all 45 states (and don’t forget D.C.!) that levy a sales tax have different rates, rules and laws. Sales tax rates can vary by county and locality, too.
One example of how state sales tax rules vary is that some states require you to charge sales tax on shipping charges, while others do not. Another example: some states might require you to renew your sales tax permit periodically, while others do not.
While this comprehensive guide will walk you through many common scenarios, always remember that you should contact an accounting professional about your specific company and situation.
Your state’s taxing authority (generally called the state’s “Department of Revenue”) can also answer general sales tax questions. Here’s a map with info on how to contact each state’s taxing authority.
The 5 W’s of Sales Tax for Online Sellers
We already covered the “why” of collecting sales tax: it’s the law and states require it. But who collects sales tax? From where do you collect sales tax? When do you have to collect and remit sales tax? And what amounts do you have to collect? Let’s dig in.
Collect Sales Tax if You Have “Sales Tax Nexus”
You are required to collect sales tax in a state where you have sales tax nexus. Sales tax nexus is just a fancy, legalese way of saying “significant presence” in a state.
While every state is slightly different, most states maintain that a merchant has sales tax nexus if they meet the following criteria:
- Have an office in the state (including a home office).
- Have a contractor or salesperson in the state.
- Store inventory, have a warehouse or distribute your products from a warehouse in the state.
- Do business in the state such as at a craft fair or tradeshow.
- Have an affiliate in the state.
- Drop ship from a 3rd party provider in the state.
Like we mentioned above, states generate a good deal of their revenue from sales tax. So it’s in their best interest to collect as much sales tax as possible. For this reason, most states interpret sales tax laws as broadly as possible.
Here are 3 common sales tax nexus examples:
- You live and run your ecommerce business in Texas. Because you have a physical presence in Texas, you have “sales tax nexus” there, and therefore are required to collect sales tax from buyers in the state of Texas.
- You live and run your ecommerce business in the state of Florida, but you hire your sister in Georgia to help you. Because you operate out of Florida and have an employee in Georgia, you now have sales tax nexus in Florida and Georgia and must collect sales tax from buyers in both states.
- Most states have ruled – either definitively or vaguely – that 3rd party fulfillment constitutes nexus. This means that if you store your goods in a warehouse in a state, then that constitutes sales tax nexus. So if you live in Wisconsin, but store your goods in California for the purposes of faster shipping, then you have sales tax nexus in both Wisconsin and California.
Example #3 can be especially cumbersome for more complex ecommerce business, such as Amazon FBA sellers, whose goods may be stored in all 16 states (and counting) where Amazon has a fulfillment centers and where states charge sales tax. Using 3rd party services can create a huge administrative burden on unsuspecting ecommerce merchants.
Sales Tax Nexus Checklist
Here are some questions to ask yourself if you think you might have sales tax nexus in a state:
- Do I live in this state and operate my business from home? _____
- Do I operate my business in this state? ______
- Do I have an employee in this state? _____
- Do I have an affiliate in state? _____
- Do I have a sales representative, independent contractor or other agent for my company in state? _____
- Do I store my products in state? _____
- Are my products distributed from a distribution center in this state? _____
- Did I sell at a craft fair, exhibition or trade show in this state? _____
- Do I work with a drop shipper located in this state? _____
If you have questions about whether or not you have sales tax nexus in a state, contact a reputable accounting professional or your state’s department of revenue for clarification.
How to Collect Sales Tax
So you have sales tax nexus in a state. Now what?
Long story short, you’re required to collect sales tax from buyers in that state. But, as with everything sales tax, how much you collect is not that simple.
Your first order of business is to get legal with the state, and register.
Register for a Sales Tax Permit
To lawfully collect sales tax, you need to register for a sales tax permit in the state(s) where you have nexus. (This is sometimes called a sales tax license.)
States require any merchants who sell taxable items in a state to register for a sales tax permit. You’ll find registration instructions at your state’s department of revenue. These permits are usually either free or fairly cheap to obtain.
When you receive your sales tax permit, your state will also give you instructions on when and how to file your sales tax returns. (We’ll talk more about this in the How to File Your Sales Tax Return section.)
States consider it unlawful to collect sales tax in their name without a permit, so don’t skip this step.
A note on taxable items: Some items aren’t subject to sales tax in certain states. For example, most clothing is tax exempt in Minnesota, while grocery items are tax-exempt in Arizona. Always check with a state’s department of revenue if you suspect you are selling tax-exempt items. In general, states get very strict about the definition of a tax-exempt product.
Determine How Much to Collect
Your next step is to determine how much sales tax to collect. Once again, this is easier said than done, especially for online sellers.
States set a sales tax rate, and then localities can add a percentage on top of those rates. For example, in the 90210 zip code, the tax rate is the 6.5% California state-wide rate, a 1% Los Angeles County rate, and an additional 1.5% local rate, for a total of a 9.0% sales tax rate.
If you run a Beverly Hills boutique, then your sales tax compliance is easy enough. You’d charge 9% sales tax to a buyer. For example, if someone bought a $200 pair of sunglasses in your boutique, you’d charge them $218. That’s $200 for the sunglasses and $18 in sales tax at the 9% rate.
But this can get tricky for online sellers, especially sellers with sales tax nexus in multiple states.
This is because the rules are different for sellers selling to buyers within their own state (where their business is based) vs. sellers selling to buyers in other states where they have sales tax nexus.
But first, a little background.
Origin-Based Sales Tax States and Destination-Based Sales Tax States
When it comes to determining tax rates, most states fall into one of two major buckets: “origin-based” sales tax states and “destination-based” sales tax states.
In layperson’s terms, this means that some states require in-state sellers to collect sales tax at the rate effective at the point of “origin” (i.e. your office or place of business) while most states require in-state sellers to collect sales tax at the rate of the “destination” (your buyer’s address).
Here’s a map of origin-based and destination-based states in the U.S.
Now that you’ve wrapped your mind around that, let us caution you that this map only applies to sellers selling within their own home state.
To make matters more complicated, most states are destination-based when it comes to out-of-state sellers.
What does this mean? Let’s look at a few examples:
(Note: When we talk about out-of-state sellers, we mean sellers who do have some sort of sales tax nexus in a state but who don’t have their main place of business in that state.)
You live in Texas (an origin-based state) and sell to a buyer in Texas – Let’s say you live in (or have a warehouse or office in) Irving, Texas, but sell to someone in Archer City. Texas is an origin-based sales tax state, so you would charge any buyer in the state of Texas a rate of 8.25%. (That’s Texas’s state-wide 6.25% rate plus Irvin County’s 1.0% plus a local Dallas MTA rate of 1.00%.) You do not need to take your buyer’s address in Archer City into account.
You are based in Georgia but sell to a buyer in Tennessee (an origin-based state) – This scenario assumes you have sales tax nexus in Tennessee (perhaps you sell through Amazon FBA.) This is where things start to get complicated for out-of-state sellers. Even though Tennessee is considered an origin-based state, you, as a seller based in Georgia, would charge your buyer the sales tax rate at her “ship to” address in Tennessee. For example, say you are based in Albany, Georgia and your buyer lives in Maryville, TN. You would charge her the 9.75% Maryville tax rate.
Of course there are exceptions to any rule when it comes to sales tax. Arizona, California and New Mexico are all origin-based, all the time. That means that even if your business is based out of state, you’ll need to charge any buyers in those three states based on the “origin” of the item within that state. Here’s one more example:
You live in Florida, but sell on Amazon FBA and sell to a buyer in Arizona – You have sales tax nexus in Arizona because Amazon FBA stores your products in a warehouse in Phoenix (Maricopa County.) If you sell to a buyer in Arizona, you would charge them the sales tax rate based on the location of the Phoenix warehouse, not based on the buyers location. Remember, this method is only valid for these three states: Arizona, California, and New Mexico.
We hope this explanation didn’t send you screaming for the hills. Sales tax is complicated. Luckily, most online platforms will assist you in collect the right amount of sales tax. However, it’s always up to you – not the channel(s) you sell through – to determine if you are collect the correct amount of sales tax from your buyers. We’ll say again that it’s generally a good idea to contact a good accounting professional if you have any questions about your specific business situation.
What to Do with the Sales Tax You’ve Collected
By now you’ve secured your sales tax permit and figured out how much sales tax to collect. Your next step will be remitting the sales tax you’ve collected to the state or states where you have sales tax nexus.
Make a note of the sales tax due dates your state’s department of revenue provides when you register for a sales tax permit. You might find that one state wants you to file a sales tax return every month while another only wants to hear from you every quarter.
Reporting How Much Sales Tax You’ve Collected
Before you can file, you must figure out how much sales tax you’ve collected.
Once again, this isn’t as straightforward as it sounds, even if you run a fairly simple ecommerce business.
To report how much sales tax you collected you need to:
- Figure out how much sales tax you collected through every channel you sell on.
- Figure out how much sales tax you collected in each state where you have sales tax nexus.
- In most destination-based states, breakdown how much sales tax you collected by county, city or other taxing jurisdiction.
These steps can get really complicated and involve spreadsheets and tax tables. Or you can use our solution, TaxJar, and let us take care of all of these for you. We’ll import all of the sales tax you collected through all of your ecommerce sales channels and then break it down into sales tax return-ready reports. We’ll even file your sales tax for you. More about that in the next section.
How to File Your Sales Tax Return
When it comes time to file, you have three options: you can file on paper (antiquated and slow), file online, or (if you use TaxJar) AutoFile. Since nobody wants to deal with paper any more, these last two versions are preferred by states. So we’ll deal with them.
File Online – All states allow you to file online, and some states even require online filing for certain sellers.
AutoFile –If you elect to sign up for AutoFile, TaxJar will automatically report, file and pay your sales tax due for you. No more dealing with math errors, spreadsheets and tax rate tables. You won’t even need to remember your state department of revenue password!
No matter how you choose to file, be sure to pay on time. Penalties for late payment or failure to file can get steep. Nobody wants to pay a $50 penalty on a $2 sales tax bill.
Some states require that you file a “zero return,” even if you didn’t collect any sales tax over the filing period. Some states will fine you for failing to file, even if you didn’t actually owe any sales tax. If you fail to file often enough, states may either take a closer look at your account to make sure you’re in compliance, or assume that you’ve closed up shop and revoke your sales tax license.
Sales Tax Discounts
There is one silver lining when it comes to filing sales tax – the sales tax discount. Some states realize that collecting and remitting sales tax is a huge burden on sellers, and they provide a small discount if you file early or on time. While these discounts are fairly tiny, they can add up. Don’t leave money on the table. If you choose to AutoFile with TaxJar, we’ll claim your sales tax discount for you.
Here’s a list of states that provide sales tax discounts.
Common Problems Online Sellers Face When it Comes to Sales Tax
By now you’ve probably recognized several ways in which sales tax can become very confusing for online sellers. These are a few of the common problems we see sellers face:
You’re not sure where you have sales tax nexus – This is one of the big ones. If you have sales tax nexus in a state, but aren’t collecting sales tax, then that state has the right to audit you and collect back taxes plus penalties. Consult the “Sales Tax Nexus Checklist” if you suspect you may have nexus in a state. Here’s some info specifically for Amazon FBA sellers who aren’t sure about how selling on FBA creates sales tax nexus.
You’re not sure when sales tax nexus begins – There are situations in which you may have products stored in a warehouse in one state and not even know it. We’ve heard from many Amazon sellers who shipped their products to a fulfillment center in one state only to discover that Amazon had sent that same inventory to another state, thus creating nexus they didn’t even know about. Keep track of your products. Specifically, if you use FBA, pull Amazon’s Inventory Event Detail report to see where your inventory is located. You can also use a paid service like WhereStock.
You’re not sure when to register for a sales tax permit – Sometimes you’re not certain that you do enough business in a state to register for a sales tax permit. OR perhaps you think you’ve registered too late. This white paper walks you through When to Register for a Sales Tax Permit.
The experts in the Sales Tax for eCommerce Sellers Facebook group are happy to provide general advice for these questions, and – we’ll say it again – contact an accounting professional for advice about your specific situation.
What International Sellers Need to Know about United States Sales Tax
Even though you may live outside the United States, if you sell on FBA or have established any other type of sales tax nexus in the United States (such as an office, a satellite branch of your business, or a warehouse where you store inventory), then you must comply by the sales tax laws of the state where you have nexus.
One common misconception about U.S. sales tax is that if you live in a country with a tax treaty with the U.S., then you – as an ecommerce seller – do not have to charge sales tax to U.S. customers. Click here for more common questions and issues facing international sellers with U.S. customers.
Current Sales Tax Issues Facing Ecommerce Sellers
The state of sales tax is always in flux. Here are a few common issues that crop up in the news from time to time and may impact you as an ecommerce seller:
Internet Sales Tax – This is the big one. Many state and federal lawmakers and retailers are pushing for an “internet sales tax” that would force more – or even all – online sellers to collect sales tax from buyers on purchases made over the internet. The most famous version of the internet sales tax, the Marketplace Fairness Act, died in congress in 2014. But lawmakers in this federal legislative sessions are already gearing up to propose another internet sales tax bill. Proponents of internet sales tax claim that it will “level the playing field” between brick and mortar retailers, who always have to charge sales tax, and online sellers, who only sometimes do. Opponents maintain that it’s unfair to put more onerous burdens on ecommerce businesses.
As of this writing, there is no active internet sales tax bill. But be on the lookout for one. You can be sure it’s coming.
States Attempting to Collect Even More Sales Tax from Even More Ecommerce Sellers – States generate much of their revenue from sales tax. And many states are currently low on funds. Because of this, states are trying new and sometimes “creative” ways to collect as much sales tax as possible.
For example, the state of Colorado attempted to require out-of-state online sellers selling into Colorado to report any Colorado buyer who bought an item tax-free. Colorado was then going to require those Colorado buyers to remit “consumer use tax” to the state. This, of course, would have put an unfair burden on sellers outside of Colorado. Fortunately, this rule will likely be struck down by the Supreme Court, but it goes to show you how far states will go in their attempt to collect as much sales tax as possible. We keep an eye on these nexus claims over at the TaxJar blog, so subscribe or check back often for sales tax news and updates.
Summing it All Up
Sales tax is complicated. But when you’re armed with the basics, it does get simpler. And now that you’ve taken the time to digest all that, go relax, eat a pizza or play a round of golf. You’ve got this.
Mark Faggiano is the founder and CEO of TaxJar, a service built to make post-transaction sales tax compliance easier for Etsy, Amazon, Shopify and other multi-channel ecommerce sellers. Mark’s passion is solving complex problems for small businesses. Sign up for a 30-day free trial of TaxJar and put a lid on sales tax!