If you’re selling products online to US customers, understanding your sales tax obligations is crucial. With different rules in 47 states, sales tax can be a complex issue for eCommerce businesses, especially those selling through their own websites. In this guide, we’ll cover the key rules and compliance steps you need to take to stay on the right side of US tax regulations.
What is Sales Tax and Why Does it Matter?
Sales tax is a state-imposed tax on the sale of goods and services. In the US, sales tax laws vary from state to state, making it essential for businesses to understand their responsibilities. Whether you are selling via an online marketplace or your own website, you may be required to collect and remit sales tax if you have a sales tax nexus in a given state.
Nexus Explained – Do You Need to Register for Sales Tax?
Sales tax nexus refers to the connection between a business and a state that triggers the obligation to collect sales tax. Nexus can be created through physical presence (such as a warehouse or office), but in the eCommerce world, economic nexus is also important. Economic nexus is based on sales volume or revenue thresholds, which vary by state. If your website meets these thresholds by selling to customers in a particular state, you’ll need to register to collect sales tax.
- Physical nexus: If you have a physical location in a state (such as a store, warehouse, or office), you almost certainly have a nexus there and must collect sales tax on sales made to customers in that state.
- Economic nexus: Even without a physical presence, you might have economic nexus if your sales to a state exceed a certain threshold, typically $100,000 or 200 transactions annually. States like California, Texas, and New York all have different thresholds, so it’s important to check each state’s rules.
Marketplace vs. Website Sales – Who is Responsible?
A business is built on two pillars: product and distribution. If you have a great product that you want to sell online, you need to decide how you are going to sell it. The big decision is whether to start selling in the existing marketplace, or to invest in personalised online store development. (The ambitious among us may do both).
The existing marketplace refers to any communal website that caters for numerous retailers and shoppers. The most popular markets in the U. S. are Amazon, Walmart, eBay, and Etsy. It’s simple to create a seller account on these platforms and start selling your products immediately. Running your own eCommerce website means the online shop belongs to your brand. Developing such a site requires paying for a SaaS solution or using an open-source eCommerce platform like Shopify or WooCommerce.
We could debate the pros and cons of each option for days, but if you want to distribute your product to the USA, it’s important you understand the US sales tax obligations of each channel…
The golden rule is this: your website, your responsibility.
All 47 US states that have sales tax oblige the seller to register and charge sales tax on their transactions if the sales are made on a web shop. Regardless of whether you deliver your products from outside the US or from fulfilment centre(s) in the states, it is your responsibility to determine whether you have created a Nexus in the state where your website has delivered to and register accordingly. Even if the majority of your sales are done on a marketplace, if you are “omni-channel” and also sell to the US from your own site, the obligations will still apply.
If you do have US sales tax obligations and end up registering in one or more states, it will then also be your responsibility to ensure your website charges the correct sales tax to the end customer at checkout. Many of the SaaS or eCommerce platforms have this functionality, but it is usually very difficult to set this up compliantly without a helping hand.
How to Keep your eCommerce Store Sales Tax compliant
eCommerce stores stay compliant with tax laws by adhering to the rules and regulations that govern sales tax collection, reporting, and remittance in the states where they do business. In the context of sales tax, compliance refers to meeting all legal obligations for collecting, calculating, and paying the correct amount of sales tax to the appropriate tax authorities.
Here’s how eCommerce stores typically ensure compliance:
1. Understanding Nexus
Compliance starts with knowing where your store has established a sales tax nexus (a connection with a state). Nexus is created when your business has a physical presence (like a warehouse) or meets economic nexus thresholds, such as a certain amount of sales or number of transactions in a state.
- How to stay compliant: Use sales tax software (like ours) to monitor your sales across states and alert you when you cross the nexus thresholds.
2. Registering for a Sales Tax Permit
Once nexus is established, you are required to register with the state tax authority to legally collect sales tax.
- How to stay compliant: Ensure you obtain a sales tax permit before you start collecting tax. Each state has its own registration process, usually through the state’s department of revenue.
3. Collecting the Right Amount of Sales Tax
Sales tax rates and rules vary by state, and even by city or county within a state. You need to charge the correct amount of tax based on the location of your customer (also known as destination-based sales tax).
- How to stay compliant: Use sales tax automation tools (e.g., Avalara, TaxJar) to calculate the exact tax rate based on the customer’s shipping address and product type. This ensures you charge the correct rate, especially for states with complex tax rules.
4. Remitting Collected Taxes to the State
After collecting sales tax, you must regularly remit (pay) those taxes to the appropriate state or local tax authorities. The frequency of remitting (monthly, quarterly, or annually) depends on the state and the volume of sales.
- How to stay compliant: Set up a filing calendar to ensure you submit taxes on time. Most sales tax automation platforms offer features that automatically file returns and remit payments to states based on your collected taxes.
5. Filing Sales Tax Returns
Even if you didn’t make any sales or collect tax in a particular period, states still often require that you file a zero-return to confirm this.
- How to stay compliant: Keep up with all filing requirements, including filing zero returns where necessary. Failure to file can result in fines or penalties, even if no taxes are owed. Make sure you’re aware of all the sales tax return filing dates for each state you sell products in – they often vary.
6. Staying Updated on Changing Laws
US sales tax laws are constantly evolving, especially as more states adjust their thresholds for economic nexus or change product taxability (e.g., how digital products are taxed).
- How to stay compliant: Regularly review tax rules in the states where you operate. Many businesses use tax software or hire tax professionals to help monitor and interpret changes.
7. Maintaining Proper Documentation
Keep records of sales, tax collected, tax remitted, and any exemptions claimed by customers (like for resale certificates). States may audit businesses, and having detailed documentation is crucial for proving compliance.
- How to stay compliant Ensure you maintain accurate, organized records of every transaction for at least a few years, depending on state laws.
Tax Compliance Made Simple (Well, Sort Of!)
Navigating sales tax compliance for your eCommerce store can feel like a daunting task, but it doesn’t have to be. By understanding where you have sales tax nexus, registering in the right states, and using automation tools to charge the correct rates, you’re already halfway there. Keeping track of your tax remittance and filing deadlines might seem tedious, but it’s a small price to pay to stay in the good graces of the tax authorities.
Remember, staying compliant isn’t just about avoiding penalties—it’s about running a smooth, stress-free business. With the right tools and a proactive approach, you can focus on what you do best: growing your eCommerce store and making your customers happy. While sales tax laws may be ever-changing, staying informed and organized will keep you ahead of the game.
So, take a deep breath, automate where you can, and tackle tax compliance like a pro. After all, running an eCommerce business should be more about selling and less about tax headaches!
The information in this article is true to the best of our knowledge at the time of writing, but sales tax regulations can change very quickly. You should always consult a tax professional for legal advice.