A Small Business Guide to E-Commerce Sales Tax

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If you sell goods online, your customers are probably all over the map. And that’s great for your business, except when it comes to determining when you’re supposed to collect sales tax.

E-commerce simplifies many aspects of starting a business, but sales tax is not 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 following the rules? This article explains what every e-commerce entrepreneur needs to know to manage sales taxes with confidence.

Overview: What is Sales Tax?

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 are generally collected and remitted by the seller.

Where sales taxes are not 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 purchases. Use taxes are simply sales taxes paid directly by the consumer rather than the retailer.

For example, suppose 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 worth 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 8%.

But you know what they say about death and taxes. The State of Pennsylvania and the County of Delaware expect you to reimburse this 8% use tax.

Businesses are expected to pay use taxes on their untaxed purchases when filing tax and use returns. Consumers are also required to report untaxed sales and pay use taxes on them on their annual tax returns.

Do e-commerce businesses have to charge sales tax?

Businesses must collect sales taxes in the states where they have an economic connection. Fiscal nexus refers to the level of connection between a company and a state that triggers tax obligations.

In the past, retailers with a physical presence in a state, such as offices or warehouses, had a sales tax tie. Under this definition, online sellers could simply collect sales taxes in the states where they had facilities and ignore the rest.

This changed with the 2018 Supreme Court decision in South Dakota vs. Wayfair, which allowed states to define the sales tax nexus more broadly to include e-commerce businesses with no physical presence within their borders.

Map of Distance Selling Laws and Nationwide Marketplace Facilitators from the Tax Foundation.

This map from the Tax Foundation illustrates state sales tax laws for distance sellers. As of this writing, Alaska is implementing a remote seller requirement for local sales tax. Image source: author

As a result of the ruling, many states enacted distance 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 point-of-sale taxes.

These developing laws greatly complicate the tax situation for your small business.

How to Comply with E-Commerce Sales Tax Laws for Your Business

The following steps will help you stay on top of development requirements and accurately manage sales tax for your online store.

Step 1: Determine where you have a sales tax connection

The first task for online sellers is to understand US sales tax laws and how they apply to your business.

As I mentioned above, 45 states impose sales taxes. States without sales tax are Alaska, Delaware, Montana, New Hampshire and Oregon. Of the states with sales tax, all but two, Florida and Missouri, currently require distance sellers to collect and remit sales tax.

Alaska is a nuanced case. Although the state does not have a sales tax, many local jurisdictions in Alaska impose sales taxes, and the state recently passed a uniform code requiring distance sellers to begin collecting them in 2020.

As States are still adjusting to the changes brought about by the Wayfair decision, you will need to review the current requirements for distance sellers in each state where you have sales to ensure compliance.

Screenshot of an SSTGB graph breaking down remote seller thresholds by state.

SSTGB provides resources to help you sort out state requirements for remote sellers. Image source: author

To understand your connection to sales tax nationally, consider the following:

  • Check thresholds. Most states have substantial sales thresholds for sales tax tie-in. The most common is $100,000 in sales or 200 transactions, so you may find that you are exempt from the requirements in many states. Exceptions include Oklahoma, with a $10,000 threshold, and Kansas, which requires collection of sales tax on the first sale.
  • Look at your business footprint. Carefully track your sales to get a clear picture of where you’re selling and your volume state by state.
  • Research state requirements. Research state laws relating to sales tax and collection by remote sellers. The Streamlined Sales Tax Board of Directors (SSTGB), National Conference of State Legislatures, and Tax Foundation have helpful charts and maps to help you sort through the requirements.
  • Include local sales taxes: Wherever you have a sales tax connection, you are responsible for collecting local and state sales taxes.

Step 2: Check Affiliate Policies

If you sell through a marketplace facilitator such as Amazon or Etsy, they can handle most of the sales tax collection and remittance for you. When working with a third party, consider the following tips:

  • Know the law: Even if you’re working with an established third-party marketplace, it’s worth familiarizing yourself with the marketplace facilitator laws in the states where you’re selling.
  • To ask questions: Ask facilitators to clarify their policies and compliance efforts. Don’t assume they take care of everything for you.
  • Check for accuracy: Periodically check your transactions to confirm that your sales are taxed accurately.

Step 3: Obtain Vendor Permits

Once you have determined where you need to collect sales tax, you will need to register your business with the revenue department to begin collecting taxes. You may need to obtain a seller’s permit or a sales tax permit in some states.

Screenshot of the Alaska Sales Tax Finder.

Alaska sales tax search tool. Image source: author

Registration is usually handled by the Ministry of Revenue and can often be done online.

  • Check out the state websites: Even if you are exempt from collecting taxes, you may need to register or complete other paperwork. Check the state department of revenue website in each state where you sell to ensure compliance.
  • Use status tools: Many states provide software to help businesses successfully manage state and local sales taxes. Alaska, for example, has developed an online sales tax search tool for distance sellers to help with compliance.
  • Discover the simplified registration: If you need to collect taxes in many states, SSTGB provides a streamlined application covering over 20 participating states.

Step 4: Collect and remit sales taxes

Each state has its own sales tax remittance process. Taxes are generally submitted monthly, although some states may allow quarterly filing. In states where you collect sales tax, consider the following:

  • Use software: Look for an e-commerce CMS and small business tax software designed to simplify collecting, filing, and remitting sales tax. The applicable rate search and automatic sales tax calculation features are essential.
  • Train employees: Make sure your employees understand how to handle sales tax for remote sales. Many states provide resources to help you, such as this Colorado sales tax training page, which includes videos and webinars.

Step 5: Monitor compliance

Since distance seller laws are still in development, it is important to perform periodic audits to ensure compliance. The following tips will help you stay on top of changing requirements:

  • Connect with states: Most tax departments have email newsletters to keep you up to date with changes in the law, so sign up for their lists. You may also be able to stay up to date with current affairs by connecting with state authorities on social media.
  • Track sales : If you are close to a sales tax threshold in a certain state, be sure to monitor your sales or set up an automated notification to ensure you register quickly if your sales exceed that level.
  • Consult advisors: Include sales tax compliance in discussions with your small business tax advisor.

Grow your e-commerce business with confidence

E-commerce is growing rapidly and states have quickly adapted in the wake of the Wayfair decision to capture their share of revenue from online sales. You can expect laws to continue to change and compliance efforts to become stricter as online sales continue to climb.

By familiarizing yourself with the laws and adopting compliance tools and processes, you can stay ahead of the game and increase your online sales with confidence.