Online Retailer Sales Tax: eCommerce Compliance Explained

Online businesses incur sales tax obligations today like never before – and have ever since the Supreme Court’s 2018 Wayfair decision unleashed economic nexus on e-commerce merchants nationwide.

Since the Wayfair ruling, every state with a statewide sales tax (and countless localities, especially in places like California and Alaska) has enacted economic nexus laws. This means that online retailers of products—and increasingly, services—must collect and remit sales tax and file returns with individual states. The thresholds can be a dollar amount in sales, a set number of sales or a combination.

Below we break down some of the factors that go into calculating sales tax when selling online

How is sales tax calculated for online purchases?

Where you sell is one of the first major determining factors for eCommerce sales tax compliance. Not only can the physical locations you sell to affect this, but also the platforms on which you sell.

Marketplace facilitators

A marketplace facilitator is a business or organization that contracts with third-party businesses to sell goods and services on its platform and facilitates retail sales. Well-known examples include Amazon, eBay and Etsy.

Laws governing marketplace facilitators popped up when states saw that the platforms were charging sales tax on the sale of their own or certain third-party sales but not on all sales. This produced a gap in tax collection. Marketplace facilitator laws also sprang from the idea that a state could collect all the required sales tax from one entity rather than from thousands of smaller companies.

If the facilitator meets the economic nexus threshold – in many states, these thresholds are the same as for sellers who aren’t marketplace facilitators – the facilitator must calculate and charge tax on those sales that it processes and facilitates. Marketplace facilitators do sometimes have their own nexus concerns over gross receipts.

From your perspective, marketplace facilitators handle collecting and remitting sales taxes on behalf of your sales in states where your marketplace is compliant. If you sell products or services off your own site as well, you may need to consider the total sales through both the marketplace facilitator and your own site to determine if you have crossed any economic nexus thresholds.

Ship-to locations

“Sourcing” is important when you determine your online business sales tax requirements. Sourcing refers to the location where a sale is taxed. Most states follow “destination-based sourcing” rules meaning you must apply the sales tax rules and rates based on the customer’s location. Additionally, for interstate commerce, when a seller ships into any state from a location outside that state, the sale is sourced to the destination point and the sales tax rate applies at the destination point.

There are some states that go against the grain and are considered origin-based states. If you are based in one of these states or you ship from within one of these states to a destination within the same origin-based state, you collect and remit sales tax according to the rules and rates applicable at the business, not final customer, location, which means “origin-based.”

One good rule to help cut through the confusion: Determine if your home state and where you ship from is destination or origin-based. If your home state and where you ship from are destination based, then you can be safe in applying destination-based sourcing to all of your transactions.

Navigating online business sales tax requirements

Determining the most effective sales tax calculation process comes with many variables: where you have nexus, the complexity of the taxability of your products/services, whether your invoices are recurring to the same customers each month, and the capabilities and limitations of your invoicing system. This is where the consulting comes in.

Some businesses can determine how sales tax is calculated for online purchases without separate software systems. Other businesses will benefit from a tax-rate only solution, while other more complex businesses will absolutely need a sales tax software.  

If you decide that sales tax calculation software is the better option, there are numerous companies to consider. Today, most sales tax calculation software is delivered in the cloud via a Software-as-a-Service model. These tools automate the sales tax calculation process by integrating with the invoicing or ERP system typically via an API (Application Programming Interface).

When it comes time to create a customer quote or invoice, the ERP system will pass certain data elements (customer location, product, sales amount and so on) to the sales tax calculation system which will then calculate the sales tax and pass back to the ERP system the applicable sales tax. This is generally done in real time in sub-second intervals.

TaxConnex has assisted companies in many industries alleviate the burden of sales tax. Contact us to  learn more about how we can take sales tax for selling online off of your plate.