The world of commerce has shifted online, allowing businesses to sell to customers everywhere. Governments want their share of the revenue generated by internet entrepreneurs, and the USA’s weapon of choice is Sales Tax – the 50 states have the authority to tax sellers from other states, and from other countries as well.
What is eCommerce Sales Tax?
eCommerce sales tax came about after the 2018 South Dakota v. Wayfair, Inc. case, which allowed states to require sellers, even without a physical presence, to collect and remit sales tax on goods sold to customers within that state.
This tax is often referred to as “online sales tax” or “internet sales tax”. But what is this kind of sales tax? eCommerce sales tax is the tax you collect from your online sales, similar to the tax you’d charge in a physical store. It’s a percentage of the item’s price and this percentage depends on which state you’re selling your goods to.
Do you have to pay sales tax on your online sales?
So, in a word: YES. Unfortunately, if you have customers in the USA, you do need to collect sales tax, but only under certain conditions. Those conditions include:
- Whether you’ve established Nexus
- If you’re selling your products through Amazon or not
The scary Latin word: Nexus
The tax man loves scary legal jargon, and the key term in the USA is NEXUS. It means ‘connection’, and tax offices have tests to determine whether they think a seller is connected enough to have to register and collect sales tax in their state.
Certain business activities, including having a physical presence or reaching a certain sales threshold, may establish nexus with the state. Economic nexus is more complicated than physical nexus because each state has its own threshold, it isn’t standardised across states.
Once nexus is established, you need to start paying sales tax.
If you have no physical presence like an office, employees or a warehouse – then you only need to worry about sales tax once your online site is successful, otherwise, you are unlikely to cross the economic nexus threshold.
Dot Com or Amazon?
There is demand for your product in the US – which is great news because online sales in America are sky-rocketing – but you need to decide which shop to use.
Amazon and similar marketplaces like Walmart.com or eBay offer you a simple route to the US market, but as most online sellers will know, it comes at a cost. The alternative is to open your own store (which is done easily by using platforms like Shopify or BigCommerce), which comes with its own unique challenges.
If you sell via Amazon to the US, you won’t have to charge sales tax. This is because the marketplace takes care of it for you. But you still might need to register for sales tax in some states.
If you sell from your own website, the chances are you will need to collect tax. This is only applicable in the 47 US states that have a sales tax system and only once you’ve established nexus (as discussed above).
What happens if you don’t pay your eCommerce sales tax?
If you don’t pay your ecommerce sales tax, you could face several consequences. First, your business might be subject to penalties and fines from tax authorities, which can add up quickly and impact your bottom line. You could also be liable for back taxes, which means paying the taxes you missed along with any accrued interest.
In more severe cases, continued failure to comply with sales tax obligations can lead to legal action, including the possibility of having your business license revoked or even facing criminal charges, depending on the jurisdiction. Additionally, not paying your sales tax can damage your reputation with customers and business partners, as it raises questions about your business practices and financial responsibility.
3 Steps for eCommerce Sales Tax Compliance
1. Register for a Sales Tax Permit
Start by registering for a sales tax permit in your nexus state. To register, contact your state’s Department of Revenue and provide basic business information.
Remember, it’s illegal to collect sales tax without a permit in many states, so make sure to get your permit before you start. Your permit will also specify how often you need to file sales taxes (monthly, quarterly, or yearly).
2. Collect Sales Tax
After receiving your permit, set up your online store to collect sales tax from applicable customers. Ensure that your system accurately calculates sales tax and doesn’t charge customers who aren’t required to pay it. The setup process varies depending on the platform you use so best to consult a sales tax expert.
Please note: You need to be aware of whether your state uses destination-based or origin-based sales taxes.
3. File Sales Tax
Finally, file your sales taxes according to the schedule provided by your state, which could be monthly, quarterly, or yearly.
Keep track of filing deadlines, as they vary by state. If your business operates in multiple states, you’ll need to report the taxes collected in each state, city, and county. For easier management, consider using online sales tax software (like ours!).
Plan ahead
If you are already selling to the US and doing well, it is highly likely you are flirting with economic nexus thresholds. Or if you have any kind of physical presence in a state, you should probably be charging sales tax. If neither of these apply, you are probably safe for now – but it’s certainly worth digging deeper into your nexus status because playing catch up with taxes can be an unnecessary and lethal problem for your business.