The sales tax imposed by E-commerce is a form of consumption tax that sellers take from their customers and transfer to the federal government. Also known as online sales tax, it is charged as an amount, but the exact amount varies based on the customer’s location and the merchant’s places of business.
It’s different when you sell online than at physical stores because you operate in several states. It’s, therefore, important to be aware of the tax structure of e-commerce and what you have to take to ensure compliance.
Table of Contents
- 1 What Is a Sales Tax?
- 2 Tips for managing ecommerce sales tax
- 3 6 Steps to eCommerce Sales Tax Compliance
- 3.1 1. Determine where you have sales tax nexus.
- 3.2 2. Verify if your products are subject to sales tax.
- 3.3 3. Legalize your eCommerce store
- 3.4 4. Install sales tax collection for your online shopping carts and marketplaces.
- 3.5 5. Report all the sales tax your business has collected
- 3.6 6. File your sales tax returns.
- 4 Sales tax calculator
- 5 Conclusion
What Is a Sales Tax?
The sales tax is a tax the government imposes on purchasing goods and services. The traditional sales tax is imposed upon the point of sale, taken by the retailer, and then passed to the federal government. Businesses are liable to sales tax in a particular jurisdiction if it has a nexus; it could be a brick-and-mortar store, an employee, an affiliate, or any other type of presence, based on the jurisdiction’s laws.1
Tips for managing ecommerce sales tax
Managing sales tax on e-commerce requires considerable effort, coordination, and help. These guidelines can assist you in keeping track of the state’s laws and collecting and transferring the sales tax owed by e-commerce to the appropriate tax authorities.
Make sure you track every penny.
One of the most effective ways to keep on top of the tax requirements for sales is to keep precise documents, according to Luca Melchionna, CM, a manager of Melchionna PLLC. In addition, a reliable accounting system can help to track invoices and sales to ensure you know the source of your sales.
In several states, tax reporting requirements are ongoing. It is essential that small businesses keep accurate records during each sale.
Keep track of each state’s deadline for payment dates.
The time you must pay sales tax on sales through online stores varies per state. Make a calendar or modify the calendar you already have with the due date of each state to ensure that payments are made to the correct authorities on the right date.
When you register with a state, you should be assigned a filing frequency (monthly, quarterly, annually, or other); these frequency types each have due dates of their own. While the due date might actually be the same date each month, for the period, the dates may change due to weekends, holidays, and other circumstances. It is therefore essential to verify the dates instead of just assuming you are aware of when they occur.”
Be aware of how to pay sales tax.
Every state has a different set of rules for the filing and payment of sales tax from online commerce. For example, some states will accept checks, while others may require you to pay online.
Make sure you have all the permits.
The company must also get any sales tax permits you could require. If, for instance, you had sold millions of dollars’ worth of products in California before the passage of the current law, you’ll need to apply for an exemption from sales tax to continue to do so. Likewise, you’ll need authorization for sales tax if you’re required to pay sales taxes in a state.
Know the consequences of mistakes and delays.
Understanding what penalties are imposed for tardy payment or error for each state is as crucial in the same way as understanding the laws in themselves. Failure to comply with laws, even in a way, can cause ongoing problems for your company, which could lead to legal action.
Get advice from an expert.
If you’re not certain that your tax obligations are in a specific state, you should consult an expert in tax, a CPA, or an attorney. Their knowledge will assist you in making the most effective decisions for your e-commerce business and ensure you’re collecting and paying the sales tax promptly.
6 Steps to eCommerce Sales Tax Compliance
When you’ve sold your products online for a long time and have established a customer base in several states, there’s a high likelihood that you’ve already established economic connections in some or all states. On the other hand, if you’re new to online selling and trying to establish yourself in your niche, you may not be able to do this. In any case, it’s essential to understand what you need to be tax-compliant across all states you are selling.
1. Determine where you have sales tax nexus.
In most cases, the laws governing economic nexus depend on the remote seller’s sales or volume of transactions within a certain time frame, usually the previous or current calendar year. A majority of states have an exemption for small-sized sellers; however, what qualifies as a small seller differs from state to state.
For California, For instance, the concept of economic nexus is initiated when a seller from a distance (and any other person who is who are related to the retailer) can make more than $500,000 of combined sales of tangible personal property to be eligible for delivery to the state during the preceding or current calendar year. The economic nexus threshold in Colorado can be greater than $100,000 in retail sales or tax-deductible services within the state. In New York, the threshold is $500,000 and 100 transactions.
2. Verify if your products are subject to sales tax.
The ability to determine whether the product you sell is tax-deductible or not tax-exempt in a specific state is crucial to determine whether you’ve economic nexus. Some states do not allow exempt transactions to be included in the economic nexus threshold. In addition, if you sell exempt items into states, you will not be accountable for collecting and paying sales tax in that state.
Taxability laws are different. The tax laws are different, of course. Most shirts are exempt from taxation in New Hampshire, where there’s no sales tax. They are taxed in California in California, where there are. Every shirt is tax-exempt in Massachusetts when priced higher than $175. If you live in New York, a shirt priced at or above $111 is subject to both state and local sales taxes no, regardless of the location where the sale is made or where it is sold. Conversely, the state exempts a shirt with a price lower than $110 from sales tax. However, it is subject to the local tax on sales in Albany County and Yonkers.
Additionally, companies that sell only sales exempt to states aren’t always exempt from paying sales tax. Most states require the remote seller of tax-exempt items or services to sign up in tax departments, record exemption sales, and submit tax returns.
3. Legalize your eCommerce store
If you’ve decided you are nexus to a state, you’ll need to be registered at the state tax office and get the sales tax permit (also called a seller’s license). Before taking sales tax from any person within the state, this should be done.
In certain states, it is required for sellers who are remote to get the sales tax permit at the time the threshold of economic nexus has been reached (i.e., before the next sale). Other states permit additional time. Therefore, you must monitor your sales in every state carefully and know what is expected. For example, if you’re supposed to be registered and paying sales tax but don’t, then you could be held accountable for uncollected sales tax.
4. Install sales tax collection for your online shopping carts and marketplaces.
All aspects of sales tax are organic. Therefore, tax rates and rules, and regulations, can change from coast-to-coast. In addition, your footprint in nexus will likely change as sales grow and states modify their laws regarding remote sales tax.
In addition, businesses that sell their goods through marketplaces could find that sales tax is mostly managed by the facilitator of sales (aka marketplace). An increasing number of states have marketplace facilitators required to collect and pay sales taxes on behalf of third-party sellers.
Even here, there could be some pitfalls for businesses that operate through e-commerce. First, some states require sellers on marketplaces to sign up and file tax returns, even though they’re not accountable for collecting and paying sales tax. Direct sales are sellers’ responsibility in e-commerce regardless of whether they sell on several platforms.
5. Report all the sales tax your business has collected
Sales tax revenue is used to fund many local and state services, such as education, police, fire services, and transportation projects. The sales tax must be correctly reported for the money to go where it’s needed.
In many states, the department of revenue in each state is the one that collects sales tax revenues and divides them among local governments as required. Each sale must be assigned the appropriate location code for this to happen. e.g., an event in San Francisco must be reported as a sale in San Francisco.
When it comes to the frequency of reporting, the volume of sales usually determines it. Businesses that don’t pay much in terms of sales tax might be able to report sales tax on a yearly or even quarterly basis. On the other hand, companies with a large volume of sales usually report their sales monthly and may need to pay a percentage of the tax due. If in doubt, verify for the appropriate state.
6. File your sales tax returns.
In order to finish the tax process, you must complete sales tax returns and pay the tax you’ve collected and deposited in trust.
Although not many people like the process of filing tax returns on sales, brick-and-mortar shops that make sales only in one state will be able to submit returns by hand without much discomfort. Ecommerce businesses that are filing returns in multiple jurisdictions may be able to find it quicker and more money-saving to automate the process of filing returns. Once it is set up, it will ease the burden and decrease audit risk in the long term.
Sales tax calculator
If you are selling online, It is important to keep up to date with the current prices and laws in the states in which your business staff, products, and customers are. Marketplace facilitator and remote seller regulations will continue to change. Therefore it’s crucial to incorporate software and conduct periodic audits to ensure that you are in compliance.