Elizabeth Gonzalez is a legal and regulatory writer with more than seven years of experience as a contributing editor for HR Specialist and BLR’s HR Insights. She is also a content strategist, web copywriter, and fiction writer with publications ranging from Engineering News-Record and Construction Business Owner to Best American Nonrequired Reading.
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If you're selling goods online, your customers are probably all over the map. And that's great for your business, except when it comes to figuring out when you're supposed to collect sales tax.
E-commerce makes many aspects of starting a business simpler, but sales tax isn't one of them. Your online store is basically open for business in 50 states, each with a unique set of sales tax laws.
So, how can you be sure you're playing by the rules? This article explains what every e-commerce entrepreneur needs to know to manage sales taxes with confidence.
Sales tax is a tax levied on the sale of certain goods and services. Sales taxes are charged by 45 states and many local governments, and they’re generally collected and remitted by the seller.
When sales taxes aren't collected by the seller, which has often been the case with interstate sales, state and local governments generally require their residents to pay use taxes on the purchases. Use taxes are simply sales taxes remitted directly by the consumer instead of the retailer.
For example, say you live in Philadelphia, where sales are subject to a 6% state tax plus a 2% county tax. You go online and buy $10,000 of furniture from an online store in Oregon. At checkout, you realize that Oregon has no sales tax. You might be excited, thinking you just saved yourself 8%.
But you know what they say about death and taxes. The state of Pennsylvania and Delaware County are going to expect you to pay that 8% back in use taxes.
Businesses are expected to pay use taxes on their untaxed purchases when filing sales and use tax returns. Consumers are also expected to report untaxed sales and pay use taxes on them through their annual state tax returns.
Businesses have to collect sales taxes in states where they have economic nexus. Tax nexus refers to the level of connection between a business and a state that triggers tax obligations.
In the past, retailers with a physical presence in a state, such as offices or warehouses, had sales tax nexus. Under that definition, online sellers could simply collect sales taxes in the states where they had facilities and ignore the rest.
That changed with the 2018 Supreme Court decision in South Dakota v. Wayfair, which allowed states to define sales tax nexus more broadly to include e-commerce businesses with no physical presence within their borders.
This map from the Tax Foundation illustrates state sales tax laws for remote sellers. As of this writing, Alaska is rolling out a remote seller requirement for local sales tax. Image source: Author
In the wake of that decision, many states have enacted remote seller laws requiring online retailers to collect and remit sales tax. Some have also passed laws requiring marketplace facilitators such as Amazon and Etsy to collect taxes at the point of sale.
These developing laws complicate the tax picture for your small business immensely.
The following steps will help you stay on top of developing requirements and manage sales taxes for your online store accurately.
The first job for online sellers is to understand U.S. sales tax laws and how they apply to your business.
As I mentioned above, 45 states impose sales taxes. The states without sales tax are Alaska, Delaware, Montana, New Hampshire, and Oregon. Among states with sales tax, all but two, Florida and Missouri, currently require remote sellers to collect and remit sales tax.
Alaska is a nuanced case. While the state has no sales tax, many local jurisdictions in Alaska impose sales taxes, and the state recently passed a uniform code requiring remote sellers to begin collecting them in 2020.
Since states are still adapting to the changes caused by the Wayfair decision, you'll have to examine current requirements for remote sellers in each state where you have sales to ensure compliance.
SSTGB provides resources to help you sort through state requirements for remote sellers. Image source: Author
To understand your sales tax nexus nationwide, consider the following:
If you sell through a marketplace facilitator such as Amazon or Etsy, they may handle the bulk of sales tax collection and remittance for you. When working with any third party, consider the following tips:
Once you've determined where you need to collect sales tax, you’ll need to register your business with the revenue department to begin collecting taxes. You may need to obtain a seller's permit or sales tax permit in some states.
Alaska’s sales tax lookup tool. Image source: Author
Registration is usually managed by the department of revenue and can often be completed online.
Each state has its own process for remitting sales taxes. Taxes are commonly submitted monthly, although some states may allow quarterly filing. In states where you collect sales tax, consider the following:
Since remote seller laws are still developing, it's important to conduct periodic audits to ensure compliance. The following tips will help you stay on top of changing requirements:
E-commerce is growing fast, and states have adapted quickly in the wake of the Wayfair decision to capture their share of revenue from online sales. You can expect the laws to continue to change and compliance efforts to become more stringent as e-commerce sales continue to climb.
By familiarizing yourself with the laws and adopting tools and processes for complying, you can stay ahead of the curve and grow your online sales with confidence.