There are many pain points that business owners must contend with when running their operations. The most consuming pain point of all is sales tax management. So what, exactly, makes it a perpetual thorn on a business’ side? Let us count the ways…it’s confusing, time-consuming, and worst of all, risky.
Undoubtedly, running a business online has the potential to expand your business and increase sales. Yet very few online business owners truly understand how to manage sales tax compliance. With the many hats they must wear and the myriad of tasks they must accomplish in a day, there is little time left for business owners to do the research. This often leads to negligence, which leads to serious financial consequences.
The Basics Of E-commerce Sales Tax
So what, exactly, is an e-Commerce sales tax? Sales tax is essentially a small percentage that is added to the total sale by an online merchant. Sales tax is considered to be a “consumption tax”. This means that consumers will only be responsible for paying tax on taxable items that they purchase at retail.
A total of 45 states in the U.S. as well as Washington, D.C. have a sales tax. In addition, the majority of these states permit local areas like cities, counties, and “special taxing districts” to include a sales tax. The result is that an online business owner must navigate through an extensive, complex web of varying sales tax laws and rules, all depending on the state in the U.S.
Do You Need To Collect Internet Sales Tax?
During the earliest days of the Internet, the sales tax laws did not require online merchants to collect sales tax. Initially, sales and use taxes were determined by Quill Corp. v. North Dakota.
This was a Supreme Court ruling which prevented states from collecting sales tax from retail purchases conducted over the Internet or through e-Commerce unless the merchant had a physical location in that state. This was decided on May 26, 1992.
The e-Commerce boom has driven sales to skyrocket in every industry, especially during the pandemic. States witnessed a dramatic drop in sales tax revenue from brick and mortar businesses.
This drove them to push for changes in the law, to expand sales tax requirements for online merchants in order to recuperate state revenue.
In June 2018, the Quill Corp. v. North Dakota ruling was overturned thanks to the “Wayfair” case which says that states can require “out-of-state online sellers” to both collect and remit sales taxes. This is regardless of whether or not the seller had a physical presence in that state.
The Road To Sales Tax Compliance
To get the complete panorama of sales tax for online merchants, you will need to work through these six steps.
1. Where Do You Have Sales Tax Nexus?
The word “Nexus” is a Latin word that means “to tie” or “to bind”. If you happen to have sales tax nexus, it’s another way of describing that your business has a tie with that state.
According to tax laws, all U.S. merchants must collect sales tax from customers in states where they have a “sales tax nexus”. The sales tax nexus can be created in the following ways:
- A location that can include an office, warehouse, or any physical place of business.
- Having personnel which can be an employee, contractor, or any person doing work for your business.
- Having inventory stored within that state will establish nexus.
- Having sales or economic nexus. In almost half the states with sales tax, a seller whose revenue or the number of transactions exceeds a certain amount, $100,000 annually or 200 transactions a year will be required to collect sales tax.
2. Confirm Whether Your Products Are Taxable
Most personal property that is tangible is considered taxable in the U.S. This includes jewelry, furniture, toothbrushes, coffee cups, etc. All will be subject to a sales tax.
Items that are considered “necessities” are not taxable in all states such as grocery items. However, prepared food purchased at a restaurant is taxable. In some states, clothing is not taxable, but luxury clothing is.
3. Register For A Sales Tax Permit
Once you have established that you have sales tax nexus in a state and that the products you sell are taxable within that state, the next course of action is to collect sales tax legally. You can do so by registering for a state sales tax permit.
The State Department of Revenue handles the sales tax registration. You have the option of registering for a sales tax permit on your own or hiring a professional to register for you.
4. Install Sales Tax Collection On Your Online Shopping Carts
After you have acquired your sales tax permit, the next step is to start collecting sales tax from your buyers. Every online shopping cart and marketplace has the capacity to collect sales tax.
5. Report The Total Sale Tax Collected
When it comes to filling out a state sales tax return, you need to figure out how much sales tax you have collected from buyers, not only in the entire state, but in every county, city, and another special taxing district.
6. File Your Sales Tax Returns
The final step is to file your sales tax return with the state. The majority of states do allow you to file your sales tax online and some even require it. If you choose to file it manually, you will need to file it by logging in to your state’s taxing authority website.
Besides confusing, having to contend with sales tax is incredibly time-consuming, inconvenient, and unprofitable. However, sales tax compliance is also necessary to keep your business afloat. The best investment of your time and money is to seek the expertise of reputable sales tax experts who specialize in the e-Commerce space.