Sales tax is a part of every online seller’s business. And in the U.S., sales tax can be particularly tricky. This guide will walk you through the five key aspects of sales tax every eCommerce sellers faces, and ensure you’re up to the challenge of handling them.
- Know Which Customers to Charge Sales Tax
In the U.S., online sellers and other retailers are required to charge sales tax to buyers in states where they have sales tax nexus. Sales tax nexus is just a fancy legalese way to say “significant connection” to a state.
If you have nexus in a state, then that state considers you on the hook for charging sales tax to buyers in the state. You’ll always have sales tax nexus in your home state, but you may find that certain business activities create nexus in other states, too. They include:
- A location – an office, warehouse, store, or other physical place of business
- Personnel – an employee, contractor, salesperson, installer or other person doing work for your business
- Inventory – Most states consider storing inventory in the state to cause nexus even if you have no other place of business or personnel
- Affiliates – Someone who advertises your products in exchange for a cut of the profits creates nexus in many states
- A drop shipping relationship – If you have a 3rd party ship to your buyers, you may create nexus
- Selling products at a tradeshow or other event – Some states consider you to have nexus even if you only sell there temporarily
To help you determine whether or not your business activities give you sales tax nexus, you can find out what every U.S. state’s laws have to say about nexus here.
Remember the rule of thumb, sales tax nexus in a state = charge sales tax to customers in that state.
- Register for a Sales Tax Permit
Every U.S. states requires you to register for a sales tax permit before you charge sales tax to buyers in that state. You can find directions for registering for a sales tax permit in each here.
Don’t skip this step! States consider it unlawful to collect sales tax in their name without first registering for a permit.
When you receive your permit, you’ll also be assigned a sales tax filing frequency. This is usually monthly, quarterly or annual. As a general rule, the higher your sales volume in a state, the more frequently you’ll file a sales tax return in that state.
- Collect Sales Tax
Once you have your sale tax permit, it’s time to ensure that you are collecting sales tax from your customers. If you sell on Amazon FBA, you’re in luck. They have a very robust sales tax collection engine, and all you have to do is tell them where to collect.
You can see video instructions for setting up sales tax collection on Amazon FBA here. If you sell on other shopping carts (like Shopify) or marketplaces (like eBay), be sure you’re collecting sales tax from your buyers there, too. You can see guides on how to set up sales tax collection on all the major eCommerce channels here.
- Report How Much Sales Tax You’ve Collected
When your sales tax filing due date rolls around, it’s time to report how much sales tax you’ve collected through all of your sales channels and file your sales tax returns.
Unfortunately, most states don’t make it simple to report how much sales tax you’ve collected. They don’t only want to see how much you collected from buyers in the state. They want you to break that amount down by the county, city and other special taxing district where your buyer lived. When states have hundreds of taxing jurisdictions, this job can get difficult quickly.
That’s where sales tax automation comes in. With a sales tax automation solution, you can connect all the shopping carts and marketplaces on which you sell. You’ll be presented with a return-ready sales tax report which you can use to file your sales tax return at your state’s website. Or, if you never want to look at another sales tax filing again, you can AutoFile your sales tax returns in most states!
- File Your Sales Tax Returns
Now that you’ve reported how much sales tax you collected, its times to file your sales tax return. If you don’t opt to use a service like AutoFile, you can file online at your state’s department of revenue website.
There are a couple of important things to remember when filing your sales tax returns:
- File zero returns – Always file a sales tax return even if you didn’t collect any sales tax. Most states require you to file even if you don’t owe a penny, and may even assess a penalty for not filing!
- Take advantage of sales tax discounts – About half the states with a sales tax allow online sellers to keep a small (usually 1-2%) portion of the sales tax you’ve collected if you file on time. Don’t pass up this free money!
I hope this guide has helped you feel confident about sales tax as an online seller. For more, read our Sales Tax for Amazon FBA Sellers Guide or join us in the Sales Tax for eCommerce Sellers Facebook Group.
TaxJar is a service that makes sales tax reporting and filing simple for more than 5,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!
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