The importance of Documenting Your Sales Tax Compliance Process
Sales tax compliance is riddled with risk. Failure to comply with the applicable sales tax rules...
|Sales Tax Obligations Start with Nexus|
|Tracking Sales Tax Nexus|
|Navigating the Complexities of Being a Remote Seller|
|How the Shopping Cart Helps|
|Staying Compliant with State and Federal Laws by Managing Sales Tax|
|The Risks of Not Collecting Sales Tax|
|How TaxConnex Can Help|
As an eCommerce business owner, it's essential to understand how online sales tax works. Sales taxes can be a complex topic, but we're going to break it down for you in this post. We'll go over who is responsible for paying sales taxes, what products are taxable, and how the amount of sales tax due is determined. By the end of this article, you'll have a better understanding of how sales tax impacts eCommerce businesses and what steps you need to take to comply with state and local laws.
The first step in understanding sales tax is to look at the numbers. Sales tax is a consumption tax levied on the sale of goods and services. In the United States, sales tax is imposed at the state and local levels. As of 2021, 45 states and Washington D.C. collect statewide sales taxes. Local jurisdictions can also set their own sales tax rates, generally managed by the state, but there are certain states where sales tax is administered at the local jurisdiction level as well, including Alabama, Louisiana, and Colorado.
But how does that affect sales tax for eCommerce? Sales tax is generally imposed on the retail sale of goods, or tangible personal property. But in some states, sales tax is also imposed on the use or consumption of certain software or services.
As an eCommerce business, it's crucial to understand how sales tax works in each state in which you conduct business. Unlike a typical retail location with a physical location where customers buy from, the internet opens you up to customers across the globe. Depending on the products you sell and the states you operate in, you may be responsible for collecting and remitting sales tax to multiple locations.
Nexus in the terms of sales and use tax refers to the connection a business has to a taxing jurisdiction, and is determined by a physical or economic presence. As mentioned above, unlike a brick-and-mortar location, an eCommerce business doesn’t always have a physical address. So outside of the company headquarters or office space, there often is no physical presence. But warehouses and traveling employees can create a physical presence as well, so don’t forget about it all together.
Your main focus as an ecommerce business will be tracking where you have established economic nexus. Established in 2018 by the U.S Supreme Court Case, South Dakota vs. Wayfair, Inc et al, economic nexus opened up sales tax to remote sellers selling into states outside of those that they have a physical presence. Economic nexus is defined by a revenue or transaction threshold and each state has the ability to set their own thresholds. The majority of states are $100,000 in revenue into a state or 200 transactions, but this can vary so it is best to investigate the thresholds for every state in which you have customers.
Once you know where you have an obligation based on nexus, you must then understand if what you are selling is taxable. In general, most states tax the sale of tangible personal property. This includes clothing (although there are certain exemptions in some states as noted below), furniture, electronics, household goods, jewelry, business and office supplies and more.
It's important to note that not all products are subject to sales tax in every state. In some states, only certain types of products are taxed. For instance, clothing is exempt from sales tax in Pennsylvania, but electronics are not.
Services are generally not taxable but that has been changing over the last few years. For example, SaaS and specific services are taxable depending on the state. Similar to nexus, it all depends on the state or local taxing jurisdiction and should be looked at individually instead of as one standard rule for all locations.
The good news is that there are many resources available to help you navigate the complexities of sales tax. The Federation of Tax Administrators provides a list of state-by-state sales tax information, including links to each state's tax agency website. The Streamlined Sales Tax Governing Board also offers helpful resources, including a list of member states and information on the Streamlined Sales Tax Project.
While many software programs can help you manage eCommerce tax, these programs are not foolproof. They are best utilized for calculating sales tax due, but that’s only one part of managing sales tax and automation isn’t always your best solution when you’re trying to manage something as complex as sales tax.
If you use a shopping cart software like Shopify or BigCommerce, you're in luck. Most of these platforms have built-in features that assist with some of your sales tax obligations including sales tax rate application and even nexus tracking. But these platforms don’t solve all of your sales tax issues. Many e-Commerce businesses have been notified by their shopping cart platform that they had reached several nexus thresholds, but they were unaware of what this meant or which states this applied to. Additionally, these systems don’t manage the actual filing and remittance processes for you. This still needs to be managed internally.
Sales tax compliance can be a complex and time-consuming task, but it doesn't have to be overwhelming. By understanding the basics of how sales taxes work and taking advantage of the available resources, you can ensure that you're collecting and remitting the correct amount of tax on all of your sales. And if you use a shopping cart software with built-in sales tax features, you can make the process even easier.
In recent years, the issue of sales tax has become more complex due to the rise of marketplace facilitators. Along with the changing economic nexus laws, many states have also added marketplace facilitator laws which state that if selling through a marketplace, the obligation of sales tax collection and remittance falls to the marketplace not the business. A marketplace facilitator is a business or person that contracts with a seller to facilitate a taxable retail sale by processing the payment and facilitating the sale. Popular examples are Amazon, etsy, and eBay. If selling products solely through a marketplace facilitator, your obligations for sales tax are only tied to states and jurisdictions without marketplace facilitator laws – which is only Missouri at this time, but that changes in 2023.
However, if you’re selling through a marketplace as well as your own eCommerce site, this opens up a new set of obligations. Even though the marketplace is collecting and remitting the tax on their platform, the revenue generated and the number of transactions processed through the marketplace will contribute to the economic nexus thresholds in most states. Many states base their economic nexus thresholds on gross receipts, which include sales by a marketplace facilitator. Also, where your inventory is stored with the marketplace can create a physical presence for your business, as a warehouse or stored inventory establishes nexus as well.
As a result, it's important to stay up-to-date on the latest sales tax developments, both at the state and federal levels. The best way to do this is to work with a tax professional that can help you manage sales tax.
As an eCommerce business owner, it's crucial to understand how sales tax works. By understanding the basics of sales tax and it’s impacts on an eCommerce business, you can ensure that you're on the right foot to maintaining your sales tax obligations.
Here are a few tips to help you stay compliant:
Understand Sales Tax Laws
Understand the eCommerce sales tax laws in each state where you have nexus. You can find this information on the Federation of Tax Administrators website or your state's tax agency website.
Know What Is Taxable
Know which products and services are taxable in each state. This information is usually available on the state's tax agency website or via a sales tax expert.
Use Built-in Software for Rates When Available
Use shopping cart software with a built-in rate calculator. This will help you map and automatically calculate and collect the correct amount of tax on all of your taxable sales.
Stay up to date on changes to the sales tax laws in each state where you have nexus. These changes can happen frequently, so it's important to watch for these updates.
Keep good records. This includes sales receipts, exemption certificates (when necessary), invoices, and any other documentation that shows when and where a sale took place.
If you don't collect and remit sales tax on taxable transactions, you're at risk if you are ever audited by any state's tax agency. This can result in fines, interest, and penalties. In some cases, you may even be required to pay back taxes that you should have collected but didn't.
Having a trusted provider to help ensure you follow guidelines and regulations is vital for any business, especially eCommerce businesses that may have nexus in multiple states. TaxConnex can help by providing dedicated sales tax support, consulting and compliance services.
TaxConnex helps you manage all aspects of your sales tax needs, from filing and remitting to staying up-to-date on the latest changes in the law. They also offer a wide range of services, including audit protection and assistance, to help you resolve any issues that arise.
As an eCommerce business owner, it's essential to have a solid understanding of how sales tax impacts eCommerce businesses. By following the tips in this article and using a firm like TaxConnex, you can ensure that you're compliant with all state and federal laws and avoid any penalties or fines.
Contact TaxConnex for help managing your sales tax obligations. TaxConnex provides a white-glove service that doesn’t leave the hard stuff to your team to manage. They provide dedicated support to remove the complexity. Contact TaxConnex at 877-893-5304 to learn more.