US Sales Tax for Online Sellers Guide

Sales-Tax

In order to sell online, depending on the state, you may need to collect sales tax. It is a requirement in 45 states, plus D.C.

The Basics:
Merchants who have “sales tax nexus” in these states are required to charge sales tax to buyers. Sales tax is considered a “pass-through” tax, because the merchant is only holding the taxes collected before remitting it to state and local taxing authorities at a set time (usually either monthly, quarterly or annually depending on gross sales).

State and sales tax funds are used to fund state projects and initiatives, including schools, roads, public safety departments, etc. Many states get a majority of their revenue from sales tax, which is one reason they’ve been taking a closer look at ecommerce sellers. In the U.S., there is no “federal” sales tax. Instead, individual states administer sales tax. Because of this, all 45 states (and don’t forget D.C.!) that levy a sales tax have different rates, rules and laws. Sales tax rates can vary by county and locality, too.

One example of how state sales tax rules vary is that some states require you to charge sales tax on shipping charges, while others do not. Another example: some states might require you to renew your sales tax permit periodically, while others do not.

While this comprehensive guide will walk you through many common scenarios, always remember that you should contact an accounting professional about your specific company and situation.

 

Collect Sales Tax if You Have “Sales Tax Nexus”
You are required to collect sales tax in a state where you have sales tax nexus. Sales tax nexus is just a fancy, legalese way of saying “significant presence” in a state.

While every state is slightly different, most states maintain that a merchant has sales tax nexus if they meet the following criteria:

Have an office in the state (including a home office).
Have a contractor or salesperson in the state.
Store inventory, have a warehouse or distribute your products from a warehouse in the state.
Do business in the state such as at a craft fair or tradeshow.
Have an affiliate in the state.
Drop ship from a 3rd party provider in the state.

Like we mentioned above, states generate a good deal of their revenue from sales tax. So it’s in their best interest to collect as much sales tax as possible. For this reason, most states interpret sales tax laws as broadly as possible.

Here are 3 common sales tax nexus examples:

You live and run your ecommerce business in Texas. Because you have a physical presence in Texas, you have “sales tax nexus” there, and therefore are required to collect sales tax from buyers in the state of Texas.

You live and run your ecommerce business in the state of Florida, but you hire your sister in Georgia to help you. Because you operate out of Florida and have an employee in Georgia, you now have sales tax nexus in Florida and Georgia and must collect sales tax from buyers in both states.

Most states have ruled – either definitively or vaguely – that 3rd party fulfillment constitutes nexus. This means that if you store your goods in a warehouse in a state, then that constitutes sales tax nexus. So if you live in Wisconsin, but store your goods in California for the purposes of faster shipping, then you have sales tax nexus in both Wisconsin and California.

Example #3 can be especially cumbersome for more complex ecommerce business, such as Amazon FBA sellers, whose goods may be stored in all 16 states (and counting) where Amazon has a fulfillment centers and where states charge sales tax. Using 3rd party services can create a huge administrative burden on unsuspecting ecommerce merchants.
Sales Tax Nexus Checklist

Here are some questions to ask yourself if you think you might have sales tax nexus in a state:

Do I live in this state and operate my business from home? _____
Do I operate my business in this state? ______
Do I have an employee in this state? _____
Do I have an affiliate in state? _____
Do I have a sales representative, independent contractor or other agent for my company in state? _____
Do I store my products in state? _____
Are my products distributed from a distribution center in this state? _____
Did I sell at a craft fair, exhibition or trade show in this state? _____
Do I work with a drop shipper located in this state? _____

If you have questions about whether or not you have sales tax nexus in a state, contact a reputable accounting professional or your state’s department of revenue for clarification.

 
How to Collect Sales Tax

So you have sales tax nexus in a state. Now what?

Long story short, you’re required to collect sales tax from buyers in that state. But, as with everything sales tax, how much you collect is not that simple.

Your first order of business is to get legal with the state, and register.

 
Register for a Sales Tax Permit

To lawfully collect sales tax, you need to register for a sales tax permit in the state(s) where you have nexus. (This is sometimes called a sales tax license.)

States require any merchants who sell taxable items in a state to register for a sales tax permit. You’ll find registration instructions at your state’s department of revenue. These permits are usually either free or fairly cheap to obtain.

When you receive your sales tax permit, your state will also give you instructions on when and how to file your sales tax returns. (We’ll talk more about this in the How to File Your Sales Tax Return section.)

States consider it unlawful to collect sales tax in their name without a permit, so don’t skip this step.

A note on taxable items: Some items aren’t subject to sales tax in certain states. For example, most clothing is tax exempt in Minnesota, while grocery items are tax-exempt in Arizona. Always check with a state’s department of revenue if you suspect you are selling tax-exempt items. In general, states get very strict about the definition of a tax-exempt product.
Determine How Much to Collect

Your next step is to determine how much sales tax to collect. Once again, this is easier said than done, especially for online sellers.

States set a sales tax rate, and then localities can add a percentage on top of those rates. For example, in the 90210 zip code, the tax rate is the 6.5% California state-wide rate, a 1% Los Angeles County rate, and an additional 1.5% local rate, for a total of a 9.0% sales tax rate.

If you run a Beverly Hills boutique, then your sales tax compliance is easy enough. You’d charge 9% sales tax to a buyer. For example, if someone bought a $200 pair of sunglasses in your boutique, you’d charge them $218. That’s $200 for the sunglasses and $18 in sales tax at the 9% rate.

 

Sales Tax Calculator

But this can get tricky for online sellers, especially sellers with sales tax nexus in multiple states.

States set a sales tax rate, and then localities can add a percentage on top of those rates. For example, in the 90210 zip code, the tax rate is the 6.5% California state-wide rate, a 1% Los Angeles County rate, and an additional 1.5% local rate, for a total of a 9.0% sales tax rate.

If you run a Beverly Hills boutique, then your sales tax compliance is easy enough. You’d charge 9% sales tax to a buyer. For example, if someone bought a $200 pair of sunglasses in your boutique, you’d charge them $218. That’s $200 for the sunglasses and $18 in sales tax at the 9% rate.

US-Sales-tax-Calculator

This is because the rules are different for sellers selling to buyers within their own state (where their business is based) vs. sellers selling to buyers in other states where they have sales tax nexus.

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