The Basics of Sales Tax for eCommerce Sellers
Collecting and filing sales tax are some of those administrative hassles that every product seller has to put up with. Fortunately, sales tax isn’t too difficult once you learn the basics. This blog post will walk you through what you need to know to successfully file your business’s sales tax returns!
It helps to understand that forty-five U.S. state and D.C. all have a sales tax requirements. When you sell taxable products, whether online or in a brick and mortar store, you’re required to collect sales tax on the items you sell. That is, if you have sales tax nexus in that state.
Sales Tax Nexus, Explained
Sales tax nexus is just a fancy legalese way to say “significant connection” to a state. If you have nexus in a state, then that state considers you on the hook for charging sales tax to buyers in the state. You’ll always have sales tax nexus in your home state, but you may find that certain business activities create nexus in other states, too. They include:
- 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. (This is the aspect of Nexus that affects many FBA sellers.)
- Affiliates – Someone who advertises your products in exchange for a cut of the profits creates Nexus in many states
- A drop shipping relationship – If you have a 3rd party ship to your buyers, you may create Nexus
- Selling products at a tradeshow or other event – Some states consider you to have Nexus even if you only sell there temporarily
If you have Nexus in a state, then that state may require you to register for a sales tax permit and collect sales tax from buyers within the state.
To help you determine whether or not your business activities give you sales tax Nexus, you can find out what every state’s laws have to say about Nexus here.
If you have Nexus in a state, your next step is to become legal with the state.
Register for a Sales Tax Permit
Before you begin collecting sales tax, you should always register for a sales tax permit. Don’t skip this step! It’s illegal to collect sales tax from customers on behalf of a state without a permit.
Sales tax permits are usually free, but some states charge a nominal fee to register. You can register for your sales tax permit yourself, or have a CPA do it for you. Here are step-by-step instructions for registering for a sales tax permit.
When you receive your sales tax permit, the state will instruct you on when and how often to file a sales tax return. Sales tax due dates vary by state, but fall during the last half of the month. Also, the higher the volume of sales tax you make in a state, the more often the state will generally want you to file a sales tax return. You may file a sales tax return monthly, quarterly, semi-annually or annually, depending on your state’s rules and your business’s sales volume.
Once you have your sales tax permit in hand, the next step to sales tax compliance is to…
Collect Sales Tax from your Buyers
Once you have Nexus in a state and are registered for your sales tax permit in a state, your next step is to make sure you’re collecting sales tax from all your buyers in that state.
Fortunately, most online shopping carts and marketplaces make it fairly easy to collect sales tax. You can read step-by-step instructions to setting up sales tax collection on the most common online shopping carts and marketplaces here.
One common mistake sellers sometimes make here is forgetting to collect sales tax from buyers in all your nexus states on all your sales channels.
Claude live in Ohio and sells on eBay and on Etsy. He hired his sister Claudia in Illinois to help him make jewelry on his Etsy store. This means he now has sales tax Nexus in both Ohio (because he lives and runs his business there) and Illinois (because he has an employee there). Since Claude has Nexus in both states, he should collect sales tax on all sales to customers in both Ohio and Illinois. It doesn’t matter that Claudia is only helping him with his Etsy store, he still needs to collect sales tax from his eBay buyers because his business now has Nexus there.
Report How Much Sales Tax You Collected
Soon enough, your sales tax filing due date will roll around.
When that happens, your first step is to figure out how much sales tax you collected in each state. It would be great if that were all you had to figure out, but almost every state also wants you to break down how much sales tax you collected by city, county and other special taxing jurisdiction. Trying to do this by hand can be a nightmare! And it’s even tougher if you sell on more than one eCommerce platform.
Instead of trying to combine all of your sales across multiple channels into a spreadsheet, and then consulting your state’s tax table to find the county and jurisdiction for each and every sale, let sales tax automation come to the rescue. A sales tax automation tool will connect with all the shopping carts and marketplaces on which you sell, and provide you with return-ready reports that you can use to file your sales tax returns in minutes, not hours.
File a Sales Tax Return
Once you’ve figured out how much sales tax you collected, your next step is to file your sales tax return with the state. You can accomplish this step online, or even let your sales tax automation solution file your sales tax return for you.
There are a couple of things to remember when filing your sales tax return:
- Sales Tax Discounts – about half the states with a sales tax will allow you to keep a very small percentage of the sales tax you collected. While this amount is generally only 1-2% of the sales tax you collected, it’s free money!
- Zero Returns – Always file a sales tax return by the due date, even if you didn’t collect any sales tax. Failing to file can result in penalties from a monetary fine to having your sales tax license cancelled. Be sure to file your return, no matter what.
I hope this post has helped you understand the basics of sale tax. You can find more information about sales tax in the individual states here. Do you have questions or something to say? Start the conversation in the comments!
TaxJar is a service that makes sales tax reporting and filing simple for more than 8,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!
If you need assistance with accounting, sales tax filing, and compliance, please use the link below to schedule a free consultation.