WooCommerce is the engine behind many of the world’s most successful eCommerce sites, including 99% of all sites developed on WordPress. WooCommerce makes it easy for merchants to market and sell their products, which has a beautiful and complicated consequence: revenue.
The problem with revenue is that when you have lots of it, there is a tax man somewhere that will want his share of it.
In this article we explain what WooCommerce users need to consider when it comes to tax in the USA…
When do I have to charge sales tax?
When you sell goods online, it is important to understand your tax obligations. Most importantly, you need to know if there is any kind of sales tax or consumption tax you should be adding to your sales price.
Most countries in the world have a VAT system, and this tax needs to be considered on retail transactions that are made in that country. The USA has Sales Tax that is governed at a state level, so sellers need to understand if they have any obligations based on their sales to every US state.
Under certain circumstances (depending on the specific legislation of the country or state), the local tax office can impose a legal obligation on eCommerce businesses to register for and start charging the relevant local tax.
For example, if an eCommerce business has Nexus in a US state, then for all sales made to customers in that state, the seller is obliged to add sales tax to the checkout price. The rate of tax to be used is based on the address of the customer and the type of product being sold.
If the WooCommerce site is not compliant – the merchant fails to register and add tax where required – then the business can be severely penalised and the tax office may even have the jurisdiction to shut down the site.
What is the process to charge the right sales tax at checkout on your eCommerce site?
Sales Tax is complicated because there is no uniform rate – every state has different rates, and even within states – the tax is calculated based on the specific locality’s rules. For example, depending on the address of the customer, a different rate can apply (even if the same product is sold). There are tens of thousands of taxing jurisdictions in the USA and the type of product sold can also impact what rate to use.
It is impossible to decide manually what sales tax rate to apply – therefore, once you are compliant and have registered for sales tax, your WooCommerce site must be programmed to charge sales tax in the states where you have nexus.
What functionality does WooCommerce offer for sales tax?
There is a native free plugin for WooCommerce called WooCommerce Tax. Although it is not 100% accurate when it comes to tax rates, it is sufficient to use if set up correctly. It will need to be configured based on your specific circumstances – specifically where you are registered for tax and your product catalogue.
If you set up WooCommerce Tax correctly, this will be sufficient to calculate tax at checkout – it will automatically decide how much tax to add to your sales price based on the product code and customer address.
Why charging sales tax on your website is not enough
Charging sales tax at checkout is only one very small part of a big Sales Tax puzzle. Firstly, you need to know where you have nexus – and this is an ongoing requirement since you will have to monitor your sales activity in all states so you know if you have to start charging sales tax in new states.
Once you understand your sales tax obligations, you have to get a sales tax permit by registering with every state. Once registered, you have an ongoing compliance obligation: you have to file a sales tax return with each state where you report the amount of tax you charged and remit the funds to the tax office. These returns are filed monthly or quarterly in most states.
You are not allowed to charge sales tax if you have not registered in a state, and you have to file tax returns every period even if you haven’t made any sales – therefore it is crucial that you see your sales tax obligation as more than simply adding the tax at checkout.
What is the risk of not complying with sales tax rules?
Tax offices are clamping down on businesses who sell to their states and don’t charge sales tax when they are supposed to. Many have formed task forces that are using bots and other methods to scrape the internet to identify games, apps, and platforms that are not adding sales tax when legally required.
Once they identify a merchant who is not compliant, they can bill you for the tax you should have charged and impose penalties. In some cases, they can take other action, including blacklisting your product or even shutting down your site or platform.
Is a more accurate Point of Sale tax software required?
The native WooCommerce Tax plugin is sufficient, but not 100% accurate. It does not have the functionality to calculate tax for all products and address codes, but it is designed to use accurate estimates when an exact rate cannot be determined. As long as the application is set up correctly, it is accepted by most state tax offices.
Owing to the complexity of the sales tax rules, most state tax offices do not expect 100% accuracy at checkout, as long as the correct amount of tax that should have been charged is ultimately reported and paid to them.
Therefore, although more sophisticated software is available to integrate with your WooCommerce site that offers close to 100% accuracy, it is not necessary as long as you configure the WooCommerce Tax correctly and file accurate tax returns each period.
What is WooCommerce and why is it great?
WooCommerce is an eCommerce plugin for WordPress. It makes creating and managing an online store simple, with reasonable levels of flexibility and several vital features such as inventory and tax management, secure payments, and shipping integration.
WooCommerce offers many helpful features, like order tracking, customer engagement, delivery status updates, inventory management, and more. With over 27 million downloads to date, WooCommerce powers 99% of all WordPress stores.