What is Sales Tax?
Sales tax is a fee collected on the sale of goods and services, usually calculated as a percentage of the sale price
Businesses are required to charge and collect commerce sales tax from clients who shop online. Similar to when a consumer is charged a tax in-store and is required to pay a percentage during the payment process, e-commerce sales tax operates similarly.
The names "online sales tax," "ecommerce sales tax," and even "internet sales tax" are widely used, however they can all be deceptive. The fact is that there isn't a separate tax intended only for online purchases.
Tax legislation has recently been revised to recognize our digital lifestyles and the fact that operating a business in a state no longer necessitates having a physical office, warehouse, or retail.
The sale's location and nexus determine whether you must collect and remit these fees, among other things. (An e-commerce merchant has "Nexus" if they conduct sufficient business there to be subject to tax requirements.)
Between 4 and 8% of a retail sale is the typical range for the minor percentage of sales tax. The retailer collects sales tax, which is then periodically transferred to the state. The state then uses that sales tax to fund national, state, and local budget priorities including public safety, education, and transportation.
State governments control sales taxes. The existence of a sales tax is a choice that each state makes, and forty-five states as well as Washington, D.C., have one. Only five states don't have a sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon.
Nexus is the word is for the requisite connection between the vendor and the state.
The legal system uses the term "nexus" to refer to a link. Before being compelled to charge and collect taxes for online transactions in a given location, vendors must have a link to that area.
varied states and courts have varied definitions of this link. However, most people concur that you must collect and submit sales taxes in a state if you have a business or office there.
Be sure to start there since many states have statutes that outline eligibility requirements. Consult the taxing authority of the state in question if you're unsure whether you have a sufficient presence there for sales tax purposes.
The particular nexus laws that apply to online retailers differ by state and may be influenced by the volume of sales and other transactions that take place there. In certain states, independent of the seller's physical presence, economic nexus rules have also been implemented, which establish nexus based on the total quantity of sales made in the state.
Because failure to collect and remit the correct amount of tax can result in penalties and interest, online merchants need to be aware of their responsibilities regarding internet sales tax. Keep your e-commerce tax game on point to keep your firm operating efficiently! Without a solid understanding of state-by-state sales tax laws, you leave your business vulnerable to audit, fines, and repayment. That’s why you must learn the specific tax laws for each state in which your ecommerce business sells. The next step is to make sure that you are collecting sales tax from customers in your nexus state(s) once you have your state sales tax authorization. Make sure you are collecting sales tax from each of your customers in your nexus states on all of your sales channels if you sell through a number of different sales channels (such as Shopify, Amazon, or Salesforce Commerce Cloud).
A feature that enables you to automatically collect sales tax from your consumers is available in the majority of online shopping carts and ERPs. Nevertheless, certain ERPs and shopping carts have more effective sales tax collection engines than others.
When should the sales tax be collected?
Online and offline retailers who sell goods and services over the Internet in the United States are only obligated to collect sales tax in states where they have "sales tax nexus."
A "significant connection" in a state is what is referred to as "a significant connection" in legalese. If you have nexus in a state, that state will consider you responsible for collecting sales tax from its residents. You will always have sales tax nexus in your home state, but it's possible that some company operations also establish nexus there. They consist of:
· A location
an office, warehouse, fulfillment center, 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
· Economic nexus
Exceeding the online sales or transactions amount set by the state whether you are based inside or outside of the United States, you must have sales tax nexus. You must charge sales tax to customers who are residents of that state if you have a business establishment there, employ locals, keep inventory there, have economic ties there, etc.
Once you begin selling products online, you must first establish nexus, register, and then collect and remit taxes in order to be in compliance. Usually, this begins in the jurisdiction where your company is registered. The majority of states have a sales tax, although several, including Alaska and Oregon, don't. You probably have "nexus" in the state if your home state levies sales tax.
Four Tips for ECommerce Sales Tax Compliance
1. Ensure your registration with the relevant state agencies
The collection and submission of sales tax to your state may be needed if you offer products or services online. You must first register with the relevant state agencies in order to do that. This could be the Department of Revenue, the Secretary of State, or another office, depending on your state. The collection and submission of sales tax to your state may be needed if you offer products or services online. You must first register with the relevant state agencies in order to do that. This could be the Department of Revenue, the Secretary of State, or another office, depending on your state.
Basic information about your company, including your name, address, and contact details, must be provided. Your Taxpayer Identification Number, or TIN, may also be requested. A sales tax permit will be sent to you after registration.
This permission must be kept on file and prominently displayed at your place of business. In some states, you must also post a bond before you can collect and send sales tax. If you don't send in the taxes you collect, the bond is supposed to protect the state.
You could have to submit sales tax returns on a monthly, quarterly, or annual basis, depending on your state. All of your sales must be meticulously documented, including the sale date, price, and tax rate applied.
If you have inquiries about applying for a sales tax permit or submitting sales tax returns, get in touch with your state's tax authority.
2 Compile, disclose, and submit your sales tax returns.
You must submit and file your sales tax returns once you have your permit and have configured your online shopping carts to collect the appropriate sales tax for each state. Once more, the reporting requirements depend greatly on the state you're remitting it to. Your sales volume normally determines how frequently you report, although enterprise-sized retailers can be ready to file taxes quarterly or even monthly.
Additionally, don't imagine you're exempt from filing if you didn't collect sales tax in a certain state during a filing period. Failure to do so may result in late or non-filing penalties, even if the total is zero.
3 Automating the handling of sales tax.
It takes a long time to try to set up and run this operation manually. We advise hiring a reputable eCommerce accounting agency or an app like Avalara or TaxJar.
These programs can assist you in locating sales tax exemptions in addition to automating the sales tax compliance procedure.
Sales tax exemptions are advantageous, but only if finding them isn't a waste of effort. It's time to outsource using software or a service provider once the advantages are no longer more than the time required to locate and get involved in the activity.
A different kind of solution is required to reduce the danger of an expensive and challenging audit. Although you could employ a full-time employee to handle this internally, not all firms have the funds to do so.
Scalable, cloud-based solutions like Avalara allow automatic filing, geolocation to identify districts and rates, and up-to-the-minute calculation accuracy. No matter how many states you are filing for sales taxes in, Avalara works with Shopify Plus to get them right.
Many businesses begin by manually following sales tax regulations, using Department of Revenue letters for one or two states where they are aware they must file.
Sadly, this approach is not scalable. When a business's collection responsibilities grow as a result of trade show participation, Fulfillment by Amazon, drop shipping, or economic nexus, what took just a few hours a month with one state could take 20 hours or more.
4 Tax Exemptions on Sales
The majority of states don't tax necessities like food, clothing, and prescription drugs. States that don't completely exempt these goods sometimes have lower tax rates.
For instance, under $110 worth of apparel and shoes are exempt from state taxation in New York. Seven states impose a full state sales tax on groceries, including Alabama, Mississippi, and South Dakota.
Tax exemptions are typically determined by, the product for sale, identifying the purchaser’ , of the product bought.
Conclusion
Sales tax compliance requires business owners to navigate a minefield of rules, regulations and deadlines, which vary widely between jurisdictions.
Business owners must negotiate a labyrinth of laws, procedures, and deadlines that differ greatly between jurisdictions in order to comply with sales tax laws.
Fortunately, most e-commerce platforms have integrated tools that track tax rates automatically and add the appropriate amount to the selling price.
Even if you utilize this tool, it's still crucial to be aware of general tax laws, apply for a permit in eligible nexus states, and pay your taxes on time.