The Basics of Sales Tax for Online Sellers

While selling online has a lot going for it, chances are you didn’t start your eCommerce business because you were excited at the prospect of filing a sales tax return. Sales tax is one of those unprofitable, time-consuming administrative hassles that every product seller must deal with. There’s no handbook when it comes to sales tax, but this post will explain the basics of sales tax and point you in the right direction to find out how to handle sales tax in your business.

 

What is sales tax?

In the United States, sales tax is governed at the state level, and forty-five states and Washington D.C. all have a sales tax.

 

The Basics of Sales Tax for Online Sellers Map of USA sales tax states

 

Most tangible products (toothbrushes, cookware, patio furniture, etc.) are taxable. So in this case, a merchant is required to collect sales tax on each sales transaction. Sales tax is a “pass-through tax” meaning it is collected from buyers by merchants and then passed on to the state. The state then uses this money to fund budget items like schools, roads, and public safety. In most states, local areas are also allowed to levy a sales tax. That’s why, as a consumer, you may have noticed that you pay one sales tax rate in your hometown, but a slightly different sales tax rate in the next town over.

 

Nearly every online seller has to deal with collecting sales tax from customers, and filing and remitting sales tax to the state. Here are the basics of getting and staying sales tax compliant. The first step is to:

 

Find out where you have sales tax nexus

“Sales tax nexus” is just a legalese way of saying a “significant connection” to a state. In the U.S., retailers (and this includes online sellers) are only required to collect sales tax from buyers in states where they have sales tax nexus.

 

Common factors that create sales tax nexus are:

  • It’s your home state – You always have sales tax nexus in your home state, even if you just work from a laptop at the kitchen table
  • 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 for sale – Most states consider storing inventory in the state to cause nexus even if you have no other place of business or personnel
  • 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

 

Since sales tax is governed at the state level, each state’s rules and laws regarding sales tax are slightly different. You can see what each state’s laws say about sales tax nexus here.

 

Once you’re determined that you have sales tax nexus in a state, your next step is to register for a sales tax permit.

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Register for a sales tax permit

You can register for a sales tax permit with your state’s taxing authority (usually called the Department of Revenue, but it sometimes goes by other names like the “Department of Taxation” or the “State Comptroller.”)

 

Here are instructions on how to register for a sales tax permit in every state. You can also hire a professional to do this for you for anywhere from $80-$100 per registration.

 

Don’t skip this step! States consider it unlawful to collect sales tax from buyers without a sales tax permit.

 

Depending on the state, you’ll receive your sales tax permit anywhere from instantaneously to up to a few weeks. The state will also assign you a filing frequency. This means you’ll be required to file either monthly, quarterly or annually. Though it isn’t always the case, the rule of thumb is that the more sales tax you collect in a state, the more often the state wants you to file a sales tax return and remit the sales tax you collected.

 

Speaking of collecting sales tax…

 

The Basics of Sales Tax for Online Sellers calculator with notepad pen receipt and glasses

 

Set up sales tax collection

Once your sales tax permit is in hand, your next step is to set up sales tax collection on all the online shopping carts and marketplaces on which you sell.

 

Fortunately, most of the major online selling platforms will handle sales tax collection for you. If you need help getting set up, we have guides to setting up sales tax collection on all the major online sales channels here.

 

One common mistake is forgetting to set up sales tax collection in all your nexus states on all of the shopping carts and marketplaces on which you sell. For example, say you have nexus in 5 states because you sell on Amazon FBA. Because you have sales tax nexus, you’re required to collect sales tax from customers in those 5 states through your Shopify store, too.

 

File your sales tax returns

So you have your sales tax permit, you’re collecting sales tax from buyers, and your online store is humming along. Pretty soon, one of your state-assigned sales tax filing due dates will roll around.

 

When this happens, it’s time to report how much sales tax you collected and file your returns.

 

Reporting is a lot more tricky than it sounds at first. States want you to break down how much sales tax you collected not just from buyers in the state, but by county, city, and other special taxing districts. This means figuring out which county, city and other districts each of your customers’ ship to addresses fall into.

 

No online shopping carts or marketplaces provide this information (in fact, it’s always changing at the state level!), so that’s where sales tax automation software comes to the rescue. Sales tax automation software connects with all of the shopping carts and marketplaces on which you sell, slices and dices your sales tax collected, and returns it all in a simple return-ready report. Better yet, you can choose to AutoFile your sales tax returns so you never need to worry about nitpicky things like figuring out which agricultural districts your California customers live in!

 

And that’s it, you’ve conquered sales tax – until the next sales tax filing due date rolls around.

 

For a whole lot more about sales tax, check out our Sales Tax 101 for Online Sellers Guide or join more than 8,000 online sellers and sales tax experts in your Sales Tax for eCommerce Sellers Facebook group. Do you have a question or something to say about sales tax? Start the conversation in the comments!

 

TaxJar is a service that makes sales tax reporting and filing simple for more than 10,000 online sellers. Sick of sales tax? TaxJar will AutoFile your sales tax returns in all 50 states! Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life.

 

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